PPP and PFI
Peter Livesey
Senior Policy Analyst
Corporate and Private Finance
7/26/2016
UK Procurement Policy
HM Treasury
Value for Money Team
General procurement policy
Office of Government Commerce
General procurement practice
Corporate and Private
Finance Team
PPP/PFI procurement policy
Departmental PFUs
PPP/PFI practice and sector specific policy
1
PFI has been effective procurement tool
• 2006 was biggest year so far for the
value of deals signed:
8
80
7
70
6
60
5
50
4
40
3
30
2
20
1
10
0
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Capital Value (£ billion)
No. of deals
Number of projects
Capital Value (£ billion)
Number and value of PFI projects by year
• 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
Total capital value of projects by department
Health - 23%
• Education - £4.4bn covering 836 schools
• Defence - £5.6bn in 47 projects
DfES - 12%
MoD - 16%
DfT - 16%
• Transport - £4.9bn in 46 projects (not
including tube deals)
2
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
3
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.
4
PFI is a small part of total investment
Total investment public services
60
Investment (£bn)
50
40
30
20
10
PSNI
Depreciation
Asset sales
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
0
PFI/PPP
• 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
5
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
Capital value of post-OJEU PFI pipeline split by department
6.0
5.0
4.0
3.0
2.0
1.0
O
e
Ho
S
M
m
DC
ffi
ce
fra
De
ts
Sc
o
LG
DC
n
Ed
u
ca
tio
NI
T
Df
th
al
He
O
D
0.0
M
Value (£ billion)
•
6
Thames and Mersey Gateway Bridges
Thames Gateway
Mersey Gateway
7
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.
8
Whole life benefits - Street Lighting and
Highways Maintenance
BCR
3.5 high
Picture courtesy of PriceWaterhouseCoopers
BCR
2.3 high
9
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
10
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.
11
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
12
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
13
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
14
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
15
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.
16
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.
17
Budget 2007
•
Publication of SoPC4
Publication of Transition Guidance
•
http://www.hmtreasury.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
18
PFI could evolve into a greater range of
models
•
•
Debt underpinning (Woolwich extension, M25)


•

May enhance refinancing gains
Risk of undermining whole life costing / innovation
Service concessions (M6 toll, Thames Gateway)


•
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)

•
More like
PFI
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
19
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
20
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.hmtreasury.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.hmtreasury.gov.uk/documents/public_private_partnerships/additional_guidance/ppp_general_g
uidance.cfm

Budget 2007
http://www.hm-treasury.gov.uk/index.cfm
21