Public Private Partnerships and Construction A Recap in HK - Presentation to the HKIS January 2009 Dr Arthur McInnis
What is PPP? Collaborative non-adversarial risk sharing relationship between the public and private sectors as principals Creating a partnership of an enduring nature Often sharing interests and objectives with funders and users With each principal contributing To achieve policy ends Create an enhanced service delivery process and Involving the purchase of specified outputs or outcomes
PPP Internationally 70 countries taking forward PPP programmes In 2007 UNESCAP committed countries to promoting PPPs with its Declaration on Public-Private Partnerships for Infrastructure Development in Asia and the Pacific
PSI Key Divisions Type Provision of Service Definition Services Assets Traditional Public Public Public Outsourcing Private Public Public PFI/PPP Private Private Public Privatisation Private Private Private
PSI Key Divisions Asset Procurement Options Public Procurement Public Private Partnerships Privatisation Traditional Source: KPMG DBFT BOT BOO DBFO Publicly regulated privately owned
PFI Delivers Better Procurement 20 Reports in the last 40 years have criticized traditional procurement including by Emmerson 1962 by Banwell 1964 Tavistock Institute 1966 by Wood 1976 The Department of Trade and Industry 1982 National Economic Development Office 1967, 1968, 1975, 1978, 1983, 1985 by Latham 1994 - by Tang 2001
8 Construct for Success Tang Report 2001 recommendation 61 alternative procurement
Traditional Public Sector Procurement Payment profile can be depicted as follows Payments Cost overruns Estimated capital cost Time overruns Running cost overruns Estimated running cost 0 5 10 15 20 Construction phase Operation & maintenance phase Years Source: PricewaterhouseCoopers
PPP/PFI Procurement Payment profile for the public sector: Payments No payments until facilities ready Payment based on usage Payment based on availability 0 5 10 15 20 Operation and Construction phase Maintenance phase Years Source: PricewaterhouseCoopers
PFI Procurement Lessons Now Being Extended Across Government Government strongly believes that many of the lessons learned from the Government s reform of the PFI are equally appropriate to other public sector procurement, and some of the key principles established through PFI should become standard practice within the public sector, irrespective of the source of finance The Government is therefore creating an office of Government Commerce. Source: HM Treasury, 2000
The Office of Government Commerce A one stop shop delivering a standard procurement process key standards common systems key values and based on principles and lessons learned from PFI
PFI Procurement Delivers Value for Money Traditional Procurement PFI Procurement Value/ price Risks retained by Public Sector Cost of finance VfM Whole life cost of procuring services Value for Money VfM
PFI Procurement Delivers Value for Money through Risk Transfer Risks should be allocated to the party best able to manage them Public: Retained risks Shared or retained risks Private: Risks passed to supplier Outline planning permission Discriminatory regulatory risk Volume risk Inflation risk General regulatory risk Force majeure Detailed planning permission Design Construction Commissioning Operating performance Project finance Technology obsolescence Source: PricewaterhouseCoopers
Evidence of Value for Money - PFI is Delivering More Projects on Time 90 80 70 60 50 40 30 20 10 0 HMT PFI Research NAO PFI Research Previous non-pfi Experience On time or early Late Source: HM Treasury and NAO
Evidence of Value for Money PFI is Delivering Greater Price Certainty 80 70 60 50 40 30 20 10 0 Treasury sample - PFI NAO sample For PFI, all changes to contract price involved changes in user requirements Previous Government experience - non PFI Source: HM Treasury and NAO
Value for Money The lively and essential debate about the effectiveness of PFI in delivering better value for the taxpayer has been largely resolved by a series of reports from the National Audit Office, parliament s Public Accounts Committee, and a Treasury Review published in July. Financial Times, 24 November 2003
Private Sector Benefits greater scope for doing public sector business expertise can be used and further developed goes to profitability growth and job creation leverage increased debt capacity lower financing costs
Public Sector Benefits reduces borrowing capital freed for other expenditures encourages public sector reform new ways of working and new approaches to service delivery improves project delivery time, cost and quality defers payments over the contract period improves cost estimates given robust analysis strategic control of the project or service delivery remains with the public sector risk transfer to the private sector
The Public s Benefits earlier access to improved facilities or services tax rates remain unaffected higher finish standards ability to maintain desired service standards any savings equal more efficient use of public money operators incentivised to deliver service standards for whole-life of the asset develops long-term outlooks and better understanding of total project costs
PPP Disbenefits Weighed against complexity higher transaction costs time consuming cost of indirect credit support lender supervision and reporting requirements
How did PPP become part of the debate in HK? HK Government had begun to rethink its role and objectives bidding/tendering process and procedures risk management and performance issues in the context of financial constraints during the Asian financial crisis and competing priorities and
PPP thus became part of the Rethinking PPP would contribute directly to reform of the public sector and civil service as part of NPM reform of the construction industry reform reform of tendering and procurement method and as a proven means to combine the competencies of the public and private sectors in service delivery
In Hong Kong PPP is Part of Private Sector Involvement - PSI PSI is defined by the Efficiency Unit as a strategy for improving public services by involving the private sector in selected roles and responsibilities otherwise performed by government
Source Efficiency Unit Private Sector Involvement Public Private Partnerships Creating Wider Markets Private Finance Initiative Joint Ventures Partnership Companies Partnership Investments Franchises Purchaser/Provider Agreements Contracting in Contracting out and Outsourcing Grants and Subventions Private Section Provision Market Provision of Services Withdrawal of Public Services Privatisation Asset sales Shares Sales in SOEs Management buy-outs
HK Government Policy We will make wider use of alternative approaches such as Public-Private Partnerships in the delivery of large scale projects under the Public Works Programme. Chief Executive Tung Chee Wah, 7 January, 2004
Planned but Failed HK Government Projects 10 LCSD Projects - Tseung Kwan O, Kwun Tong West Kowloon Cultural District Supermax prison on Hei Ling Chau Shatin and Pillar Point water treatment plants Central Police Station/Victoria prison/ redevelopment Hong Kong Police Training College Hospital Authority Central Food Production facility New Infectious Disease hospital Prince of Wales Hospital redevelopment Kai Tak stadium Centre for Youth Development
What went Wrong? There was a failure to respond to concerns - that there was no accountability Approvals though will not be relevant. PPP expenditures will be more predictable. True financing and operating costs will be tabled. Further Audit Commission and Director of Audit can review the deals.
Responding to Concerns That PPP will result in civil service staff reductions Staff concerns can be addressed through consultation, disclosure, comparable terms and legislation if need be.
Responding to Concerns That private sector financing costs more than the public sector Usually though not always but the gap is narrowing. Funding costs account for only 1/3 of the project costs and value for money has to be demonstrated over and above this for projects to proceed.
Responding to Concerns That no government or department should commit itself for 30 years at a time. Hong Kong does though all the time with such commitments being made every day in any case with capital works expenditures. PPP actually adds flexibility to these decisions through reviews, benchmarking and market testing.
Responding to Concerns That PPP is a sop to the private sector. PPP should have no affect on Government or Department spending or policy priorities. Both should be set BEFORE deciding on what is a procurement mechanism.
Some lessons Government needed more expertise to improve and communicate more effectively to better protect the public interest to better articulate the public sector role to be more adaptable to streamline the institutional structure standardise the documentation pilot some projects and find the political commitment and support local champions
Sources and Further Reading Project Finance for Construction & Infrastructure, 2007 HM Treasury - Standardisation of PFI Contracts General Revised 2002 Building Better Partnerships; Commission on Public Private Partnerships National Audit Office - PFI: Construction Performance HM Treasury - Meeting the Investment Challenge, 2003 PricewaterhouseCoopers - Public Private Partnerships: A Clearer View, 2001 Partnerships UK: Public Private Partnerships 2003