Michael Fox Commercial Specialist

Global Challenges and Public Private Partnerships

Lessons from the

UK experience

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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

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3

Traditional procurement - cost overruns

Guy’s Hospital

Budget: £36m

Guy’s Hospital

Outturn: £124m

Faslane Trident Submarine Berth

Outturn: £314m

Scottish Parliament

Budget: £40m

Scottish Parliament

Outturn: £431m

Faslane Trident Submarine Berth

Budget: £100m

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Current deals and capital value by financial year

Source: PFI annual data collection UNCLASSIFIED

0

10

20

30

40

50

60

70

0

1

2

3

4

5

6

7

8

9

1990

-91

1991

-92

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

Num

ber o

f Dea

ls

Capi

tal v

alue

(£m

)

Financial Year

Number of Deals Funding requirement (£m)

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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

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Did it work?

Yes but…….

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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 25-30 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.

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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

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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.20-30 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

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Key changes

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• 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;

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Mixed model of UK infrastructure today

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

Developing an effective national plan and setting out priorities

Enabling long-term investment

Ensuring delivery

Infrastructure UK’s objectives

National Infrastructure

Plan PPP policy Delivery

Support

Key outputs

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UK Guarantees Scheme – why are we doing it?

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• 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

UK Guarantees Scheme – what is it?

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• 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 2012

UK Guarantees Scheme – application and approvals process

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UK Guarantees Scheme – progress to date

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• 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

Approaches to PPP – what have we learnt?

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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

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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

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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

Michael Fox Commercial Specialist, Infrastructure UK

michael.fox@hmtreasury.gsi.gov.uk

Thank you

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• 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

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PPP challenges – what you need to think about and get right

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 2015-16

• New project approvals tracker 23

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• 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

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Public sector equity in PPP: Policy Objectives

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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;

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New Shareholder Arrangements for PF2

Authority

SPV

Hold Co PF2

Contract Shareholder (2) (Public Sector)

Shareholder (1) (Developer Equity)

Shareholder (3) (Institutional Equity)

Equity Competition

Winning Bidder

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• 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)

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SERVICES WHERE THERE IS FLEXIBILITY ON WHETHER

THEY ARE INCLUDED IN THE PF2 CONTRACT

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.

ALL SERVICES

Required by the Authority in order to operate the building effectively

SERVICES INCLUDED IN PF2 CONTRACT

Charged on a fixed monthly basis

MANAGEMENT SERVICES

Contract Management, Utilities Costs, Insurance,

Business Rates

MINOR MAINTENANCE OBLIGATIONS

Internal wall finishes, ceiling finishes, floor finishes, interior

door and window repair, lighting consumables , graffiti

removal and other minor maintenance

OTHER SERVICES

ICT Services, Reception, Telephony, Health & Safety, etc.

MAINTENANCE

Maintenance ManagementPlanned MaintenanceReactive MaintenanceStatutory Maintenance

SOFT SERVICES

Cleaning & Waste, Pest Control,

Catering, Security,

Laundry , Mail

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

ENERGY MANAGEMENT

Tracking and reporting energy consumption, and identifying energy saving opportunities

ELECTIVE SERVICES

Services which the Authority can choose to add to the PF2 on an annual or one-off basis

such as:

Portable Appliance TestingPeriodic Redecoration

External Window CleaningSnow and ice clearanceGrounds MaintenanceHandyman Service and

Other minor maintenance obligations

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More flexible service provision

UK PPP responsibilities

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Major Projects Authority & Efficiency Reform Group

Cabinet Office

Local Procuring Authority Private Finance Units

xxx Ministry Private Finance Units

Local Partnerships (50% owned by HM Treasury)

Infrastructure UK HM Treasury

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.

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Reform of the Private Finance Initiative

• 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

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Call for evidence