Global Challenges and Public Private Partnerships. Lessons from the UK experience. Michael Fox. Commercial Specialist UNCLASSIFIED
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1 Global Challenges and Public Private Partnerships Lessons from the UK experience Michael Fox Commercial Specialist
2 Why did UK embark on a PPP/PFI programme in the 1990s? Reform / modernisation of ageing public services and infrastructure Improved value-for-money procurement of public services (cost and time overruns) Antidote to short-termism in both public and private sectors (built-in good behaviour) Contestability in delivery of public services Improved transparency of costs of public services delivery Brentside School, London 2
3 Traditional procurement - cost overruns Guy s Hospital Budget: 36m Guy s Hospital Outturn: 124m Faslane Trident Submarine Berth Budget: 100m Scottish Parliament Budget: 40m Faslane Trident Submarine Berth Outturn: 314m Scottish Parliament Outturn: 431m 3
4 Current deals and capital value by financial year 9 70 Capital value ( m) Number of Deals Financial Year 0 Number of Deals Funding requirement ( m) Source: PFI annual data collection 4
5 UK distribution of current PFI projects by value today Number of projects: 725 (Operational: 665) Capital value: 54.2bn (Average: 75m) Source: PFI annual data collection 5
6 Did it work? Yes but. 6
7 Criticisms of PFI In some cases the returns to equity investors in projects have been too high relative to the risks they bear; investors are perceived to have made windfall gains at the expense of the taxpayer Off-balance sheet classification - budgetary incentives for departments to use private finance? A lack of transparency of the future liabilities to the taxpayer given the majority of PFI projects are excluded from Public Sector Net Debt; Long-term contracts for certain services can be too inflexible given public sector changing needs; Question whether public sector gets VFM from fixed price maintenance and lifecycle over years; Certain risks transferred to the private sector may not have provided good value for money, resulting in higher risk premiums, inefficient capital structure and/or capital reserves being maintained; Reduced availability and increased cost of long-term debt finance; and The PFI procurement process has often been lengthy and costly for both the public and the private sector. 7
8 PF2: A New approach to Public Private Partnerships At the Autumn Statement 2012, the Government concluded its review of PFI and published full details of a new approach to public private partnerships PF2. Procurement has now commenced for the first PF2 programme in the school sector 8
9 The core principles of the traditional PFI approach remain the same under PF2 1. Authority transfers responsibility and risk for asset/service to Contractor 2. Contractor takes on obligations for c years 3. Contractor builds, manages, finances, maintains asset and provides lifecycle service. One stop service 4. Lenders fund Contractor on limited/ non recourse finance basis 5. Authority pays Unitary Charge for available/acceptable service 6. A single Private Finance Contract regulates the relationship 9
10 Key changes Improving transparency is at the centre of the new arrangements contractual and through equity ownership); Equity Returns: Public sector equity to enable better partnerships between public and private sector; Funding competitions for private sector equity Rethinking service provision encouraging a more bespoke approach with certain risks previously transferred to the private sector now retained by the public sector or in some cases be shared; Procurement will be faster and less expensive, without sacrificing quality and competitiveness (discuss?). Projects will be structured to facilitate access to capital markets or other sources of long term debt finance; 10
11 Mixed model of UK infrastructure today 11
12 Infrastructure UK s purposes To provide a new strategic focus on infrastructure across government sectors To focus on effective delivery of infrastructure To recognise the growing need to invest in infrastructure and address financing challenges To tackle emerging risks and opportunities from increasingly interdependent infrastructure networks To support economic growth Infrastructure UK s objectives Developing an effective national plan and setting out priorities Enabling long-term investment Ensuring delivery National Infrastructure Plan Key outputs PPP policy Delivery Support 12
13 UK Guarantees Scheme why are we doing it? Avoid delays to infrastructure projects caused by shortage of long-term financing Encourage broader range of investors to the infrastructure space While avoiding crowding out new private sector initiatives 13
14 UK Guarantees Scheme what is it? Using the UK s sovereign credit rating to support infrastructure projects Scheme extended in the Spending Review to 31 December 2016 Possible types of guarantee: Debt guarantee Counterparty obligation guarantee Construction period support Coverage of other financial obligations Commercial basis no state aid Up to 40 billion initially available under Infrastructure (Financial Assistance) Act
15 UK Guarantees Scheme application and approvals process
16 UK Guarantees Scheme progress to date Enabling legislation received Royal Assent on 31 October 2012 Positive engagement with the European Commission Over 160 enquiries received to date and projects with a capital value of 37 billion are pre-qualified for further consideration Sectors seen to date include rail, road, energy, waste management, housing and higher education projects 4 guarantees issued: Drax Power, SDCL Energy Efficiency, Greater London Authority, and Merseylink
17 Approaches to PPP what have we learnt?
18 PPP works well where Stable policy environment and long term planning horizons high degree of confidence that the infrastructure and services will be required throughout the life of the contract Major capital investment need, requiring effective management of risks associated with construction and delivery Nature of the requirement allows public sector to define its needs as service outputs in a way that ensures effective and accountable delivery of public services Nature of the assets and services (and associated risks) are capable of being priced on a whole life, long term basis Private sector is able to manage the risks and be responsible for delivery Risk allocation can be clearly defined and enforced
19 PPP works well where A project is not so large or complex that the private sector is unable to bear the risks being transferred A slow rate of technological changes as projects involving a high IT content are unlikely to provide the stability in demand required A capital investment of at least 50m as less capital intensive projects seldom justify the procurement and management costs involved Private capital at risk incentivises delivery to time and cost, with performance related payments Competitive bidding market Strong public sector governance and skilled teams
20 PPP works less well where Project/service likely to undergo significant change Demand / solution not inherently long term Risk of obsolescence (no privately financed ICT projects allowed now in UK) Project is too small Project is too complicated Procuring authority is inadequately skilled
21 Thank you Michael Fox Commercial Specialist, Infrastructure UK
22 PPP challenges what you need to think about and get right Developing a policy framework and gaining stakeholder buy-in Strong political support Public sector workforce issues Ensuring transparency of private sector return and public acceptance that private sector profit is legitimate Transparency of public sector accounting Handling the message of social change Building up the public sector expertise Encouraging new sources of long term finance Long lead times Cost of procurement 22
23 New transparency arrangements Equity returns and sale prices to be published HMT director on the board, local level observer HMT central unit will publish an annual report New whole of government total in national accounts for PFI / PF2 New government spending control total for commitments arising from centrally funded off balance sheet PFI and PF2 contracts, limiting payments in nominal terms to 70 billion for the five year period commencing New project approvals tracker 23
24 Public sector equity in PPP: Policy Objectives More collaborative approach to project performance and risk management Direct participation in strategic decision making Increased transparency regarding project and financial performance, equity IRR and profits realised on sale of equity Implementing Government policy on tax avoidance 24
25 Public Sector Equity investor Government co-investment as a minority shareholder; Invested by central unit in the Treasury; Funded by the procuring authority/ sponsoring department; Priced at a market rate; Size of the stake determined on a project by project basis; 25
26 New Shareholder Arrangements for PF2 Winning Bidder Shareholder (1) (Developer Equity) Authority Shareholder (2) (Public Sector) Hold Co PF2 Contract Equity Competition Shareholder (3) (Institutional Equity) SPV 26
27 More flexible service provision removing soft services, such as cleaning and catering, from projects providing procuring authorities with discretion on the inclusion of certain minor maintenance activities at the project outset and additional flexibility to add or remove certain elective services once a contract is in operation; Introducing periodic efficiency reviews of service provision. Flexibility over programmed maintenance, open book costing (and share life cycle surplus) SERVICES INCLUDED IN PF2 CONTRACT Charged on a fixed monthly basis MAINTENANCE Maintenance Management Planned Maintenance Reactive Maintenance Statutory Maintenance ENERGY MANAGEMENT Tracking and reporting energy consumption, and identifying energy saving opportunities HELPDESK Provision of a central system to respond to requests and plan and monitor performance LIFECYCLE RENEWAL Planned replacement of assets to maintain the efficiency and appearance of the building ALL SERVICES Required by the Authority in order to operate the building effectively SERVICES WHERE THERE IS FLEXIBILITY ON WHETHER THEY ARE INCLUDED IN THE PF2 CONTRACT MINOR MAINTENANCE OBLIGATIONS Internal wall finishes, ceiling finishes, floor finishes, interior door and window repair, lighting consumables, graffiti removal and other minor maintenance ELECTIVE SERVICES Services which the Authority can choose to add to the PF2 on an annual or one-off basis such as: Portable Appliance Testing Periodic Redecoration External Window Cleaning Snow and ice clearance Grounds Maintenance Handyman Service and Other minor maintenance obligations THE SERVICES NOT INCLUDED IN THE PF2 CONTRACT Managed directly by the Authority using other service providers on short term contracts, or by using their own resources. SOFT SERVICES Cleaning & Waste, Pest Control, Catering, Security, Laundry, Mail MANAGEMENT SERVICES Contract Management, Utilities Costs, Insurance, Business Rates OTHER SERVICES ICT Services, Reception, Telephony, Health & Safety, etc. 27
28 UK PPP responsibilities Infrastructure UK HM Treasury Local Partnerships (50% owned by HM Treasury) Local Procuring Authority Private Finance Units Major Projects Authority & Efficiency Reform Group Cabinet Office xxx Ministry Private Finance Units Institutional responsibilities for PPPs in England are shared between different bodies, reflecting the maturity of the market and the level of devolution that exists. The most significant of these entities are summarised in chart to the left. 28
29 Reform of the Private Finance Initiative Call for evidence December 2011 the Government initiated a fundamental reassessment of the Private Finance Initiative Broad based engagement process all interested parties invited to respond to a call for evidence 155 responses were received and published 100 roundtable and bilateral engagements 29
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