Coordination Group PPP
NORDEFCO Strategy
Addendum 1
Date
Designation
2010-08-27
FINAL DRAFT!
Page 1 of 12
NORDEFCO strategy
Public-Private Partnerships
2010
Ways of raising efficiency in the military through
cooperation with or benchmarking against the
private sector
NORDEFCO Strategy
Addendum 1
Date
Designation
2010-08-27
FINAL DRAFT!
Coordination Group PPP
1
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INTRODUCTION .......................................................................................................................................... 3
1.1
1.2
BACKGROUND ........................................................................................................................................... 3
THE NEED TO DEVELOP A JOINT STRATEGY ................................................................................................ 3
2
THE PURPOSE OF PUBLIC-PRIVATE PARTNERSHIPS .................................................................... 3
3
THE OBJECTIVES OF PPP IN NORDEFCO ........................................................................................... 4
4
SUCCESS FACTORS .................................................................................................................................... 4
A. Definition of military core activity and core competence...................................................................... 4
B. Development of consensus as to why and how PPP should be used ..................................................... 5
C. Ensuring a holistic approach for the utilisation of PPP within the area of the Armed Forces ............. 5
D. Development of skills within the area of PPP among the Armed Forces ............................................. 5
E. Identification of laws, provisions, regulations and agreements, which impact on the possibility of
providing PPP solutions ................................................................................................................................ 6
5
MAIN CATEGORIES OF PPP AND DEFINITIONS ................................................................................ 6
5.1
5.2
5.3
OUTSOURCING........................................................................................................................................... 7
FINANCIAL SOLUTION ................................................................................................................................ 8
PARTNERSHIPS .......................................................................................................................................... 8
6 THE NORDEFCO FLOWCHART FOR MAPPING EFFICIENCY ON WHICH TO BASE
DECISIONS CONCERNING PROCUREMENT OF A PPP SOLUTION ....................................................10
If you have ay questions regarding this document please do
not hesitate to contact Mats Josell (editor of this document),
[email protected] +46704486612
NORDEFCO Strategy
Addendum 1
Date
Designation
2010-08-27
FINAL DRAFT!
Coordination Group PPP
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1 Introduction
The intention of this document is to present the NORDEFCO strategy for utilising PublicPrivate Partnerships (PPP) within each nation’s political framework, to improve efficiency,
and provide practices and guidelines for using PPP. To implement the strategy a method of
improving efficiency is enclosed, comprising how to analyse the area(s) in a structured and
documented way.
The NORDEFCO Coordination Group Public-Private Partnerships (CoG PPP) aims at getting
more value for money in the Armed Forces. This strategy is the framework for the joint PPPeffort of the NORDEFCO countries’ Armed Forces.
1.1
Background
The Armed Forces constantly face a challenge of finding ways of raising efficiency – for
example through internally improving processes, and sometimes through cooperation with
other nations or the private sector. Cooperation with the private sector can be made as PublicPrivate Partnerships.
PPP is a new name for an old concept that has been a natural part of military operations from
time immemorial. Military logistics have always been more or less dependent on the civilian
sector of society. What has changed is only the extent to which and how close to combat this
dependency has reached. This applies to food as well as munitions.
1.2
The need to develop a joint strategy
The focus and use of PPP solutions within and among NORDEFCO has increased over the
past few years. A joint strategy is therefore needed to implement a common understanding of
the concept for better communication and cooperation, and also to gain a common and
efficient method for NORDEFCO's PPP processes. This will also make it easier to adapt each
others experiences from different cases.
2 The purpose of Public-Private Partnerships
By maximising the benefits of PPP, more activities within our core business will be possible.
An increased and coordinated utilisation of PPP solutions will contribute to:

ensure that the Armed Forces have access to the services/supplies/facilities required in
order to carry out their core activities.

an improvement in professionalism within the activities being carried out in the form of
PPP as well as within the Armed Forces. This will lead to a more cost-efficient utilisation
of allocated resources.

securing that the management at all levels can focus on core military activities.

standardization, facilitating cooperation in the Nordic as well as the international arena.
The private sector aims to achieve economies of scale, which will further reinforce that
national special arrangements will be avoided and that the opportunity for interoperability
will increase.
NORDEFCO Strategy
Addendum 1
Date
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
streamlining and increasing freedom of action with available resources. Reducing longterm obligations and focusing activities on processes which create sought-after response
capacity and reducing other activities as much as possible.

identifying and terminating non-relevant activities.
3 The objectives of PPP in NORDEFCO
PPP should be regarded as a natural alternative and
must always be considered prior to procurement.
In order for PPP to be an effective tool within NORDEFCO which could contribute to the
fulfilment of the objectives that are expressed in this document, the following intermediate
objectives need to be achieved:
1. The concept of PPP should be adapted by those in charge of procurement, maintenance,
disposal and the purchasing of services/supplies/facilities within the NORDEFCO
countries.
2. Directives for all NORDEFCO groups to consider the possibilities for PPP in their area of
responsibility. It should be mandatory for all programs to have a formal information brief
from the CoG PPP implementing the method into their programs.
3. Those who are in any other way affected by PPP processes should have some knowledge
as to what PPP means and encompasses.
4. Any individual who is looking for knowledge of PPP knows where the information and
support is to be found.
5. Armed Forces are strongly advised to set up a permanent PPP unit.
6. Central coordination is available for ongoing PPP activities
7. PPP experiences should be documented and collected in a database
8. Guidelines and checklists are available as support to evaluate whether a PPP solution is
suitable and how PPP activities should be carried out.
9. For all PPP activities that are being considered, are underway or ongoing, there is a
documented analysis available according to the guidelines enclosed.
4 Success factors
Management attention is imperative for success.
The areas that are of significance in order to achieve the objectives are presented below,
together with measures taken and proposals for action within each area.
A. Definition of military core activity and core competence
There must be a clear picture of activities and functions that could be subject to PPP solutions.
Core activity and core competence are defined by each country. The definition should be used
to discern what should and what should not be the subject of PPP considerations and for the
choice of an appropriate procurement strategy.
Coordination Group PPP
NORDEFCO Strategy
Addendum 1
Date
Designation
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FINAL DRAFT!
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B. Development of consensus as to why and how PPP should be used
It is necessary for the parties involved to balance potential gains and risks within PPP. A
balance between reducing long-term commitments and an increased development of
partnerships requires clarity both within and between the Armed Forces as well as their
suppliers.
Within the area of PPP, transparency and consensus/acceptance must prevail within the
Armed Forces and also between the defence agencies as regards to strategies so that they can
be fully coordinated. This has primarily to be achieved through:

Established conditions for dialogue and networking between the agencies/authorities and
the trade unions concerned.

Established forms for the Armed Forces’ continued and extended cooperation with other
agencies/ authorities as regards PPP.

Established and used forms for the dissemination of information as regards the Armed
Forces’ view of PPP through private operators.

Established and used forms for the dissemination of knowledge concerning PPP within the
Armed Forces.
C. Ensuring a holistic approach for the utilisation of PPP within the area of the Armed
Forces
It is important that the Armed Forces together with the agencies/authorities concerned
develop common strategic objectives whereby the Armed Forces’ assignments and objectives
should be governing. Rationalisations must be viewed holistically among the common
defence agencies/authorities, so that imbalances and sub optimisations do not arise.
A PPP solution may be profitable in monetary terms for a wing of the Armed Forces that has
chosen the solution, but it may have negative consequences for Armed Forces’ activities on a
strategic level. Fundamentally, the outcome of PPP solutions should be of benefit to the
Government(s).
Analysis should always be carried out in a similar fashion to ensure the holistic view. In this
way traceability is improved as regards decision-making. This is achieved primarily by:
The NORDEFCO flowchart for mapping efficiency on which to base decisions concerning
procurement of a PPP solution, provided in chapter 6. Using this method ensures a
holistic perspective and traceability.
D. Development of skills within the area of PPP among the Armed Forces
The use of PPP solutions requires special skills and the development of tools within a number
of areas, not least within the legal and commercial fields. This competence must be made
available to all agencies working with PPP solutions within the area of the Armed Forces. It is
advisable to form a single PPP entity of excellence and not to build up redundant resources.
Enhanced skills are achieved primarily by:

Analysing and benchmarking against other countries which should take place on a
continuous basis, in particular as regards PPP within the defence sector.

This document, which was written in order to transfer and share the knowledge and the
insights from the participating nations in the NORDEFCO Coordination Group PPP.
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
An established and up-to-date database of experiences containing implemented PPP
solutions.

The development and sharing within the NORDEFCO of skills relating to PPP.

The implementation of formalized PPP education.
E. Identification of laws, provisions, regulations and agreements, which impact on the
possibility of providing PPP solutions
The objective is to identify laws/provisions/regulations/agreements which can have an effect
on the possibilities for the Armed Forces to realise the full potential of PPP solutions. The
work should result in a general view of the legal references which may be affected so
consideration can be taken at an early stage prior to a possible PPP solution. Qualified legal
personnel should be involved in all faces of the programs.
5 Main categories of PPP and definitions
PPP relate to different forms of collaboration between public and private sector operators with
regard to services, supplies and facilities. PPP comprise a wide range of solutions, i.e.
outsourcing, financial solutions and partnerships.
A common denominator of PPP solutions is that the Armed Forces first define their needs and
requirements with regard to the function and quality of the services, supplies and facilities
required. Thereafter, based on the requirements made, the private operators together with the
principal will be able to suggest, develop and provide the services, supplies and facilities.
Many of the principles behind different PPP solutions are similar, as are the potential risks. A
common feature of PPP solutions is that the Armed Forces first define the functional and
qualitative requirements for services/ necessities/facilities. Thereafter it is the private players
who, in the contract dialogue with the principal, propose, develop and provide what is
requested on the basis of established requirements.
In what follows, three main categories of PPP are
described. In each category there are a number of
more or less refined PPP solutions, some of the
more usual of which are presented in greater
detail.
Defining concepts such as outsourcing, and
partnership etc. in an unambiguous manner is
difficult, for which reason the concepts are
described in the next three subchapters with the
help of characteristic features and examples. It is
also important to remember that PPP solutions
are seldom found in their pure form. The solution that is adopted in each specific case may
often be a combination of PPP solutions, incorporating features of all of the categories
described.
Coordination Group PPP
5.1
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Outsourcing
Outsourcing is the process of handing over the whole or parts of an internal activity to one or
more external suppliers. The supplier in turn guarantees to deliver the agreed capacity,
quantity and quality. Normally it is possible to have competitive bidding from multiple
suppliers at regular intervals.
The reason why outsourcing is considered is usually an anticipated reduction in costs, quality
improvement and better sharing of risks. This is obtained (where there is a functioning market
in the area) through, among other things, benefits of scale offered by a specialised supplier
with a large customer base or cost-effective production. It is not always the case, however,
that these advantages apply to the activities of the Armed Forces. In the case of certain
materiel, the market virtually amounts to a monopoly and certain services, necessities and
facilities are used in such a limited extent and in such limited numbers, that benefits of scale
are scarcely possible.
Moreover, it is sometimes the case that the cost aspect is not the only important thing; there
may also be explicit targets for reductions in the number of employees in one’s organisation.
In an international context, for example, the number of military personnel who are allowed to
enter a field of operations may be limited by the receiving nation. In such cases the
outsourcing of certain functions may be a solution, so that the personnel of the activity that is
outsourced are not counted as military personnel by the receiving nation.
The savings in terms of manpower and costs are by no means easy to calculate. If a lorry
belonging to a civilian distributor is armed, the driver has been trained in operating in an area
of conflict, and the transport is protected by armed military personnel, in what way does this
delivery differ from a purely military one? The civilian contractor charges for these
preparations, extra materiel, and a risk premium for his personnel etc.
Any judgment as to whether the advantages outweigh the disadvantages in any outsourcing
that is contemplated must be linked to each individual case and given situation. It is
impossible to say unambiguously that a particular function, service or capability is not part of
the core competence of the Armed Forces, thereby making it relevant for outsourcing. Most
people would agree that supplying soldiers and officers domestically with three meals a day
and a sandwich for supper is not part of core operations, although catering for a unit on active
service in the jungles of Africa during a guerrilla assault would probably be regarded as such.
There are two subcategories of outsourcing: facility management and deployment contracting.
Combinations of these two and also of them with other PPP solutions are common.
Included in the term facility management, as the word facility implies, are normally support
services associated with premises of some kind. For services of this type, there exist in nearly
every case a well-functioning market and wide experience on the part of the defence
authorities.
NATO distinguishes between deployment contracting which supplements in-house activities
(e.g. the maintenance of complex material) and deployment contracting which replaces inhouse activities (e.g. restaurant operations). Irrespective of which type of deployment
contracting is involved, it must be based on a well-thought-out strategy. It should not be
employed on an ad hoc basis or as a reaction to the discovery at the last moment of a lack in
one’s own capability.
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NORDEFCO Strategy
Addendum 1
Date
Designation
2010-08-27
FINAL DRAFT!
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It is important to involve the employee organisations and the personnel early on in the work
leading up to a PPP solution.
5.2
Financial solution
The international term project finance is the basis for developing partnership solutions of this
type between the private and the public sector. External classification/valuation by an
independent finance company is one way of validating the correctness of one’s assumptions
and that the calculations are realistic. In addition, there is also an incentive for a “lifetime
approach”, which helps to counteract a common tendency to save on maintenance in the short
term.
Leasing is one method of renting property. A lease is an agreement whereby a lessor gives a
lessee (the Armed Forces) the right on agreed terms for an agreed period to use an asset in
return for payments. A lease or lease-purchase agreement may be entered into, provided that
viewed over the entire economic life of the item leased, it involves lower costs for the state
than acquisition via a purchase. Finance leasing rarely has this effect and the payments should
be counted against borrowing levels. It is important, therefore, to be able to distinguish
between finance leasing and operating leasing, which at times is a fine distinction to make.
A finance lease is a lease in which the economic risks and benefits associated with ownership
of an asset are transferred substantially from the lessor to the lessee. The lessor functions as
source of finance for the lessee to acquire property which he wishes to use in his business.
Since the lessee does not need to make an acquisition in order to have access to the property,
it is possible, in principle, to acquire and make use of it without the need for contributed
capital or other security than the lease item. The payment obligation of the lessee is, in
principle, strict and independent of use. The lessee bears the risk of the property after it has
been handed over to him.
In operating leasing the risk for the necessity/facility is not transferred to the Armed Forces,
but remains with the lessor. In practice, this means that the Armed Forces have a function or
availability without needing to be concerned about future needs for upgrading or scrapping,
for example. Payments (rentals) for items that are held under an operating lease are charged to
the income statement over the period of the lease.
PFI stands for private finance initiative, which in its pure form means that private players are
responsible for the financing and operating of an infrastructure/facility in a long-term
contract. It is suitable when the private sector is able to provide a service connected to a
facility which is acquired with the help of private financing and the payment mechanism
reflects the provision of a service, not an asset. A common argument that is put against
privately financed partnership solutions is that the government by and large invariably has
lower capital costs than private players. The capital cost is determined mainly by the specific
project risks and not by where the capital comes from. It is also important to remember that
the actual capital cost is generally a minor part of the total cost of investments in materiel and
facilities.
5.3
Partnerships
Partnership-like solutions mean that the content and forms of cooperation differ from the
traditional customer-supplier relationship. The traditional contractual form of cooperation is
based on the contracting parties being able in detail to manage and control each other’s
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obligations and actions. Not infrequently this results in two contracting parties, who each
strive to get as much as possible out of the agreement. It has proved to be the fact that the
more detailed the contract and the assignment specification, the greater the number of
potential conflicts and discussions about matters such as implementation and extra tasks. This
applies especially in those areas where circumstances can change during the contract period.
One characteristic problem is over optimism in the initial stages. Before a project has been
approved, its advocates are tempted (more or less unconsciously) to underestimate costs and
potential obstacles. This applies to both NORDEFCO members and potential suppliers.
A formalised variant of a partnership-like solution are strategic partnerships, which have been
utilised by the Armed Forces for a very long time in relation to various domestic suppliers. It
is possible to take legal action against one’s partner since the partnership essentially rests on
traditional contracts. A partnership with industry is one way of streamlining the production of
a complex service, necessity or facility. The goal of the partnership is to try and derive benefit
from the way in which the market works and the knowledge and competences of the
companies in the provision of a service, necessity or facility. The Armed Forces endeavour to
attain cost-effectiveness, while the private players strive to secure an acceptable profit margin.
In cases where it is not possible to arrive at a definitive picture of requirements since the end
product needs to be adapted to a constantly changing outside world, project alliances may be
preferable. This form of contract provides the players involved with strong incentives to
achieve a product result, with costs controlled over time. The profit for all the parties involved
is greater if the costs can be kept under control and do not increase over time. Project
alliances are mainly suited to high-risk projects involving: high degree of untested
technology, complex and undefined interfaces, large need for interaction between customer
and suppliers along the way, tight timetable, continual changes in requirements during
ongoing projects (moving targets) or finally complex picture of stakeholders.
Fundamental for an alliance are: The parties are collectively responsible for carrying out the
work and take joint responsibility for all risks associated with implementation of the project.
The alliance is controlled by a joint board, all of whose decisions are taken unanimously. No
party may be overridden. If no agreement can be reached about a decision, a new solution
which is acceptable to all parties must be found. The day-to-day management of the project
takes place through integrated project management made up of all parties (including the
project owner). What governs personnel appointments is what is considered to be best for the
outcome of the project. The parties agree to resolve all issues within the alliance without
resorting to legal measures. In a small number of predefined cases, however, it is possible to
go to arbitration. The suppliers are allowed to take part in the decision process right from the
start, enabling them to better understand and feel responsibility for the entire process, not just
for the sub-systems they themselves deliver.
The payment model in alliances is designed to push the behaviour of the parties (including
that of the project owner) in the right direction. If one of the parties does not perform well,
this will have a financial impact on all the parties in the alliance. It is therefore in the interest
of all parties to jointly identify, analyse and eliminate risks – including those risks which
would otherwise (in a traditional contractual relationship) have affected one of the parties.
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6 The NORDEFCO flowchart for mapping efficiency on which to
base decisions concerning procurement of a PPP solution
The flow below outlines what needs to be achieved before and after a possible procurement of
a PPP solution. On analysis and evaluation of possible PPP solutions, all of the following
steps must be taken into consideration by the Armed Forces. In the event of any deviation
being made from the checklist below, reasons for this must be motivated and documented.
1. Define what should be done.
Draw up the need of the Armed Forces for the service/necessity/facility in question in
terms of:
 functionality
 security
 quality
 time.
2. Describe how this function or work is/will be carried out.
 For existing operations: Describe how this function or work is carried out today,
together with the players taking part in delivering the service/necessity/facility
 For existing operations: Is there a potential for greater efficiency? (E.g. how would
we carry out this function or work if we made a fresh start?)
 For new operations: Describe how this function or work would be acquired and
carried out under own management and the players who would probably take part
in the delivery of the service/necessity/facility.
3. Answer the question of what main methods can be employed.
Generate alternative ways of satisfying the needs of the Armed Forces and describe
them briefly.
4. Describe the effect on deployment capability.
The effect on the deployment capability of the Armed Forces nationally and
internationally
 Conflict level
 Geography
 International law
5. Describe what effect regulations have on opportunities.
Identify what laws, rules, regulations and agreements affect the scope for employing
proposed PPP solutions in the case in question. Describe how security might be
affected, and how this will be handled. Laws, regulations and agreements that may
affect the feasibility of PPP solutions are identified and the needs for any changes or
consequences are directly reported to the level, which can alter them, i.e. to the
government, supreme commander or appropriate head of staff.
6. Document expected effects and the aim of the PPP solution.
The aims and expected effects of PPP solutions should be well-thought-out and clear
and should be documented.
Partial report (1)
7. Survey the state of knowledge.
Identify which players should take part in further preparation of a possible PPP
solution. Also identify the need for external expertise in the form of specialists.
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8. Analyse the market.
Analysis of the supplier market for the service/necessity/facility sought after. If
necessary, make an RFI (Request for Information).
9. Identify who should carry on future work.
Establish a work group (possibly in the form of an ITP – Integrated Project Team) and
allocate staff and monetary resources to it. Any participation by possible suppliers
should conform to the Public Procurement Act.
10. Make clear the decision process and time required.
Who decides? When should the work be completed? Make clear to the work group the
decision process, timetable and mandate up to the time that procurement starts.
Partial report (2)
11. Calculate the public sector comparator.
What is the cost/what should it cost us and what has it cost others? This presupposes
an analysis of one’s own business, including potential scope for efficiencies.
12. Identify risks.
Identify risks and propose their allocation among the various players. Also make clear,
where appropriate, how these risks are handled today. Yet again security issues needs
to be described.
13. Third-party income and second-hand value.
Identify any possibilities of third-party income and second-hand value linked to the
acquisition.
14. Possibility of taking back.
Describe how the service/necessity/facility can be taken back in the future and, if
possible, the costs of this.
15. Ensure competence and knowledge over time.
Identify what knowledge transfers the Armed Forces needs to have over time for the
PPP solution. By ensuring the necessary access to, for example, raw data and
processed data as well as experience, opportunities are created of retaining ordering
and evaluation competences over time.
16. IPR (intellectual property rights)
Identify IPR issues and suggest how these should be handled.
Partial report (3)
17. Key competence
Present a plan for how key competence at the Armed Forces or their representatives
(e.g. for project management, ordering and evaluation) should be guaranteed over
time.
18. SWOT analysis
An analysis should be carried out of strengths, weaknesses, opportunities and threats.
All the alternatives, from retaining the operation under own management to
implementing PPP to varying extents, should be summarised in a SWOT matrix. This
matrix should form the basis of decisions whether or not to go for a PPP solution.
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19. Follow-up, control and evaluation
Proposals about how follow-up, control, evaluation and feedback of experience should
take place during the PPP project.
Final report (4)
20. A decision to proceed to procurement.