PPP and PFI

1
PPP and PFI

• Peter Livesey
• Senior Policy Analyst
• Corporate and Private Finance

2
UK Procurement Policy
HM Treasury
Corporate and Private Finance Team PPP/PFI
procurement policy
Value for Money Team General procurement policy
Departmental PFUs PPP/PFI practice and sector
specific policy
Office of Government Commerce General procurement
practice
3
PFI has been effective procurement tool

• 2006 was biggest year so far for the value of
  deals signed
• closure of a small number of big deals
• progress of projects initiated 2/3 years ago
• Key sectors of PFI investment
• Health - 8.3bn has delivered 64 operational
  PFI hospitals
• Education - 4.4bn covering 836 schools
• Defence - 5.6bn in 47 projects
• Transport - 4.9bn in 46 projects (not
  including tube deals)

4
Project Delivery
PPP/PFI delivers benefits on time and on budget
Conventional Procurement PFI
Projects over budget 73 20
Projects late 70 24
Source UK National Audit Office
5
PFI is delivering in operation

• users are satisfied with the services provided by
  PFI projects and their contribution to better
  public service outcomes
• PFI is delivering the services required with over
  90 of public service managers believing that
  services provided are satisfactory or better
• the incentivisation within PFI contracts is
  working with the payment mechanism improving the
  service being provided in the PFI projects.

6
PFI is a small part of total investment

• PFI has played a small role providing 10 15
  of total investment
• HMT ring-fences local authority PFI through
  credit regime (incl schools), no separate control
  for central govt (incl hospitals)
• HMT sets qualitative and quantitative VFM tests,
  standardised contract terms, provides scrutiny/
  approvals, and sets policy/guidance on, for
  example, workforce issues
• Partnerships UK (45 HMT owned) provides project
  specific support

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What is in the 20.7bn pipeline?

Department Capital value (m) Current status
Future Strategic Tanker Aircraft (FSTA) MoD 2506 Preferred Bidder
M25 Transport 1500 Published OJEU
Defence Training Review MoD 1400 Preferred Bidder
Leicester Hospital Health 711 Preferred Bidder
Birmingham Highways Maintenance Transport 688 Published OJEU
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Thames and Mersey Gateway Bridges
Thames Gateway
Mersey Gateway
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UK Policy - PPP/PFI
At investment appraisal value for money must be
assessed over the whole lifetime of a project,
including disposal, estimating the costs and
benefits to society as a whole, not simply those
directly relevant to the purchaser - e.g.
environmental impact.
The decision to use PFI is taken on value for
money grounds alone, but not at the expense of
employees terms and conditions. The accounting
treatment of a PFI project is not relevant to
this decision.
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Whole life benefits - Street Lighting and
Highways Maintenance
BCR 3.5 high
BCR 2.3 high
Picture courtesy of PriceWaterhouseCoopers
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UK Policy - VfM

• Ex-ante
• Capital strategy considered as part of
  Spending Review process
• Specific investment options identified and
  appraised using the Green Book
• Capital projects prioritised within
  Departments capital programme
• Those areas which may be suited to procurement
  through PFI identified

•  Stage 1 Programme Level Assessment
• Applied to the subset of investment identified as
  potentially suitable for PFI
• Central PFU liasing with team coordinating
  Spending Review submission
• Should be done in time with Spending Review
  submissions

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UK Policy - VfM

• Stage 2 Project Level Assessment
• Constitutes part of Outline Business Case for
  each project
• Project team updates analysis from Stage 1 with
  project specific information and identifies any
  key VfM issues
• If VfM is demonstrated then this assessment is
  noted in the OBC.
• If VfM is not demonstrated, then consider
  alternative procurement routes. Project should
  not proceed as PFI.

• Stage 3 Procurement Level Assessment
• Continuous assessment of whether drivers of value
  for money are maintained until financial close.
• Proceed with procurement ensuring there are no
  material changes such as market failure.

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HMT assessment PFI benefits

• Captures private sector management expertise
• Incentivises whole life costing in provision of
  serviced assets
• Real risk transfer 90 projects completed on
  time
• Operational satisfaction levels are high 80 or
  higher
• HMT policy control increases contract discipline
  and ensures projects are well scrutinised
• PFI now a reasonably well understood procurement
  model with a mature market

14
PPP/PFI delivers Whole Life Benefits

• Strong evidence of innovation in street lighting
  PFI projects
• White light lanterns saving 25-30 of energy
  consumption
• LED illumination for signs and bollards
• Lower wattage control equipment
• Induction lighting (100,000 hours burning time
  rather than 20,000)
• Better directed light projects supported by the
  Dark Skies campaign.
• The significant investment in street lighting is
  leading to greater expenditure on research and
  development by manufacturers which is resulting
  in technological innovation.
• Source 4Ps review of operation PFI projects

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HMT assessment issues

• Perceived lack of flexibility
• Operational issues capacity to facilitate minor
  service changes
• Adaptability to meet high level policy changes
• Locks in public sector revenue spending on
  servicing assets (but gives certainty)
• PFI less suited to some areas lack of specified
  outputs (e.g. IT), smaller projects
• Private sector returns debt refinancing (action
  taken to put in place gain share arrangements),
  significant equity returns
• Public sector skills PFI is complex making it a
  challenge for public sector bodies to act as a
  client. Procurement times too long average of
  25 months in education, 38 months in health.
• Additionality Risk that PFI is used for
  additional / non-essential infrastructure
  investment, e.g. street lighting

16
Continuing to improve PFI procurement

• The Government is proposing to
• Enhance the capability of PFUs. Resource linked
  to funding allocation
• Ensure that public servants with complex
  procurement experience are retained
• Develop procurement skills by providing training.
• Improve project maturity

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Comprehensive Spending Review

• Departmental capital funding announced at the
  2007 Spending Review.
• HM Treasury looking for meaningful improvements
  in private finance units so that support
  infrastructure is sufficient to manage capital
  investment programme.
• Ability to deliver investment is key.
• PFI Credit envelope of 3.6bn pa announced in
  2007 budget.

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Improving operational performance

• Guidance on benchmarking and market testing.
  Project transition guidance published with the
  2007 budget.
• Operational taskforce helpdesk facility
• changes to standard PFI contract in areas such as
  performance and payment mechanisms and variation
  mechanisms
• Project governance guidance
• Variation mechanism for operational projects.

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Budget 2007

• Publication of SoPC4
• Publication of Transition Guidance
• http//www.hm-treasury.gov.uk/media/6F9/E2/pfi_pro
  jecttransition_210307.pdf
• Announcement of PFI Credit envelope of 11bn to
  support LA PFI projects
• Move to international reporting standards in
  2008-09
• Changes to corporate taxation incl capital
  allowances - PM and IBA

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PFI could evolve into a greater range of models

• Debt underpinning (Woolwich extension, M25)
• Could reduce cost of borrowing by c. 50-70 basis
  points
• Risks undermining contractor discipline
• Flexible contract lengths e.g. contract
  termination / asset transfer triggered at
  threshold level of profit (Croydon Tram, Second
  Severn)
• May enhance refinancing gains
• Risk of undermining whole life costing /
  innovation
• Service concessions (M6 toll, Thames Gateway)
• Maintains / enhances discipline on partner (risk
  transfer)
• May undermine whole life costing
• Asset sales (BAA)
• High level of discipline on owner / total risk
  transfer / whole life costing
• Lose public sector control subject to regulation
• Will remain off balance sheet

More like PFI
Less like PFI
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M25 Possible New Approaches

• Long construction period 8 years
• Large capital value 2bn
• Innovative financing could create savings
• Debt Underpin
• Up-front capital
• Milestone capital payments
• Debt Funding Competition
• Equity Funding Competition

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Databank

• HM Treasury policy guidance
• Transforming Government Procurement
• http//www.hm-treasury.gov.uk./media/4EA/89/govern
  ment_procurement_pu147.pdf
• Green Book
• http//www.hm-treasury.gov.uk/economic_data_and_to
  ols/greenbook/data_greenbook_index.cfm
• PFI Policy
• VfM, standardised PFI contracts, project list
  (all financial data)
• http//www.hm-treasury.gov.uk/documents/public_pri
  vate_partnerships/ppp_index.cfm
• Accounting
• http//www.hm-treasury.gov.uk/documents/public_pri
  vate_partnerships/additional_guidance/ppp_general_
  guidance.cfm
• Budget 2007
• http//www.hm-treasury.gov.uk/index.cfm