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PPP and PFI

PPP and PFI. Peter Livesey Senior Policy Analyst Corporate and Private Finance. UK Procurement Policy. HM Treasury. Corporate and Private Finance Team PPP/PFI procurement policy. Value for Money Team General procurement policy. Departmental PFUs

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PPP and PFI

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  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 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

  7. What is in the £20.7bn pipeline?

  8. Thames and Mersey Gateway Bridges Thames Gateway Mersey Gateway

  9. 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.

  10. Whole life benefits - Street Lighting and Highways Maintenance BCR 3.5 high BCR 2.3 high Picture courtesy of PriceWaterhouseCoopers

  11. 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 Department’s 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

  12. 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.

  13. 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

  15. 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

  17. 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.

  18. 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.

  19. Budget 2007 • Publication of SoPC4 • Publication of Transition Guidance http://www.hm-treasury.gov.uk/media/6F9/E2/pfi_projecttransition_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 - P&M and IBA

  20. PFI could evolve into a greater range of models More like PFI • 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 Less like PFI

  21. 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

  22. Databank HM Treasury policy guidance: • Transforming Government Procurement http://www.hm-treasury.gov.uk./media/4EA/89/government_procurement_pu147.pdf • Green Book http://www.hm-treasury.gov.uk/economic_data_and_tools/greenbook/data_greenbook_index.cfm • PFI Policy VfM, standardised PFI contracts, project list (all financial data) http://www.hm-treasury.gov.uk/documents/public_private_partnerships/ppp_index.cfm Accounting http://www.hm-treasury.gov.uk/documents/public_private_partnerships/additional_guidance/ppp_general_guidance.cfm • Budget 2007 http://www.hm-treasury.gov.uk/index.cfm

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