Presentation on theme: "Tony Williams Building Value Ltd the independent strategic advisor to the building materials, construction & support services sectors 6 December 2002."— Presentation transcript:
Tony Williams Building Value Ltd the independent strategic advisor to the building materials, construction & support services sectors 6 December 2002
Infrastructure improvement in Europe: private and/or public? Private Finance Initiative in UK “another fine mess you got me into” but “the report of my death was an exaggeration”
PFI Established in 1992 (by a Conservative government) Alternative method of procuring services for the public sector ‘Build now, pay later’; just like hire purchase and government eventually owns the asset Revenue not capital spend; ex-PSBR Public Private Partnerships (PPP) employ joint capital; ownership does not revert to government
Another fine mess…. Current ‘witch hunt’ on PFI Blanket media criticism Focus on project delays; costs; value; ideology Accounting practices have been questioned Controversial proposed PPP of London’s Underground Railway
Report of death is an exaggeration £100 billion worth of schemes - £22 billion completed - £14 million where formal contracts signed - £64 billion of schemes in the pipeline This compares to annual UK construction output worth circa £80 billion
What are the main issues? Timing and cost Government is cheapest borrower Value for money; transfer of risk – for Government Off balance sheet funding Re-financing and ‘windfall’ profits ‘Build now pay MORE later’
Positives Need - £100 billion worth of schemes to date National & regional government support Abundance of capital Returns are attractive Participants see higher quality earnings
Negatives Protracted development and project delays Costs and value for money / windfall profits Bureaucracy / ideology / negative surveys Poor privatisation record The contractor Accounting
Solutions 1 Positives exceed negative ‘WACC’ by 22% Half the negatives are logistical: timing; bureaucracy; accounting; negative surveys Re-definition needed plus education, training and establishment of a new PFI executive The accounting issues are on the mend…. ----and why not blow PFI’s trumpet?
Solutions 2 New practices, accounting standards & forecasting Industry rationalisation will help Standard contracts to streamline procurement Commoditisation and bundling Finance raised in form & price that reflects risk
Solutions 3 Role and responsibility of government needs to be agreed A strong owner in place from the outset Replace contractor as front man A full empirical audit of PFI
Value for money test is flawed Is private provision of services better than public? Build cost of asset is the yard stick; it is called the Public Sector Comparator (PCS) Alternative is to ‘rent’ asset over 25, 30 or 40 years This is the basis of comparison Government asks which is cheaper: buying an asset or buying a service?
‘Apples with Oranges’ Cannot compare build cost with rent of same asset over number of years is wrong Net Present Value (NPV) of rents is massively risky Rents need large discount due to scale of uncertainty If not, then NPV of rents is grossly over-estimated... …and building the asset will look more attractive
Discounting ‘rent’ vs capital cost Government traditionally uses 6% discount rate (and Treasury proposes change to 3.5%) PFI projects are long lived Consequences of small differences are huge If PFI discount rate is wrong by 1%... …then cost of private provision maybe overestimated by 14% of a 40 year project
Value for money (VTM) test fails Contrary to popular conception, VTM universally underestimates private sector provision: - failure risk: user pays only on receipt of service - inherent risk of service: the asset may not be busy - quality of private service is not recognised - potential for productivity is ignored (as focus for government is reduced cost)
What needs to change? Different discount rates for PFI projects and PSC Study sensitivity of existing projects… …and look at those which failed Reassessment of the reassessment procedures Need a clear idea of PFI’s financial benefits
PFI conclusions A debate that can be won Vital for infrastructure provision & public services Vital for economic growth Vital for sound public finances It is competitive and…. ….there is a wall of money for PFI to scale
“…I am not going to go to parents and children and patients…and say I’m sorry because there’s an argument about PFI we’re going to put these projects on hold. They don’t care who builds them. So long as they’re built. I don’t care who builds them…” Tony Blair, British PM, Sept 2002
Your consent to our cookies if you continue to use this website.