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UK Procurement Policy HM Treasury Corporate and Private Finance Team

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Presentation on theme: "UK Procurement Policy HM Treasury Corporate and Private Finance Team"— Presentation transcript:

0 Peter Livesey Senior Policy Analyst Corporate and Private Finance
PPP and PFI Peter Livesey Senior Policy Analyst Corporate and Private Finance 3/27/2017

1 UK Procurement Policy HM Treasury Corporate and Private Finance Team
PPP/PFI procurement policy Value for Money Team General procurement policy Departmental PFUs PPP/PFI practice and sector specific policy Office of Government Commerce General procurement practice

2 PFI has been effective procurement tool
2006 was biggest year so far for the value of deals signed: 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 Education - £4.4bn covering 836 schools Defence - £5.6bn in 47 projects Transport - £4.9bn in 46 projects (not including tube deals)

3 Conventional Procurement
Project Delivery PPP/PFI delivers benefits on time and on budget Conventional Procurement PFI Projects over budget 73% 20% Projects late 70% 24% Delivering the BCR Delivering the benefits on time (5% reduction = 32.5bn) Source UK National Audit Office

4 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.

5 PFI is a small part of total investment
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

6 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 1400 Leicester Hospital Health 711 Birmingham Highways Maintenance 688

7 Thames and Mersey Gateway Bridges
Thames Gateway Mersey Gateway TGB – public transport a priority 6 lanes 2 for public transport + walking and cycling MGB – congestion relief

8 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. First in Transforming Government prociurement Second in SLTP Two mesh together when considering sustainability

9 Whole life benefits - Street Lighting and Highways Maintenance
BCR 3.5 high BCR 2.3 high Picture courtesy of PriceWaterhouseCoopers

10 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

11 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.

12 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

13 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

14 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

15 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 PFUs will be appropriately resourced to provide support to procurement teams in departments and local authorities. An appropriate mechanism will be put into place to retain experienced public servants so that they can be deployed on projects across the public sector, possibly on secondment. Continuing to discuss with Departments Creating a career path for the public sector, people to follow projects as they arise Need to be joined up with wider procurement issues through OGC Training Pilot course run earlier this year Working with PUK, 4Ps and OGC to take this further The maturity of projects when they go to market will be improved by requiring the procuring authorities to do more upfront work. Better quality of OBC’s and more robust departmental assessment Bringing forward full business case prior to preferred bidder. Consistent with competitive dialogue The package of measures to be introduced will look at where approval processes in departments and complex projects need to be changed, and develop a mechanism to identify at an earlier stage where problems develop during procurement. The spread of best practice will reduce procurement timescales and costs, including standardising the Government’s approach to design issues across different sectors. Best practice governance model About people and processes/clear roles and responsibilities, making sure they are in place early on in order to efficiently procure and manage projects Raising skills 2.4 At the heart of any procurement are the people involved in carrying it out. To get goods and services that are consistently fit for purpose and value for money is challenging and requires people with specialist skills whether in the public or private sector. 2.5 The Government will transform the GPR by: Appointing the Chief Executive of the OGC as head of the service, to raise its status, in line with the approach taken in the Government Economic Service and Government Statistical Service; Relaunching the service as the professional procurement body within government, extending from new entrants to the profession to the most senior procurement posts in government; Identifying, as part of the new procurement capability reviews, those departments that should appoint procurement or commercial directors at board level or appropriately qualified non-executives; Strengthening the links between the head of the service and the commercial directors and heads of procurement in departments, including involvement in their appointment and performance appraisal as appropriate; Tailoring the professional services and membership of the GPS to align more closely with the requirements of those it serves; Supporting those undertaking complex procurements by ensuring that the GPS is flexible enough to concentrate resource where it is best deployed, and by facilitating secondments within the public sector and between the public and private sectors; Introducing new and flexible entry points into procurement roles in government, including a graduate entry scheme to be used across government, piloting a procurement option within the fast stream and developing a mid career procurement development scheme; Raising the standards and status of procurement across government; and Embedding common standards and skill sets across government procurers through a programme of training and development, to enable professionals who properly understand the principles of value for money on a whole-life costing basis to engage with the market in a sophisticated manner. 2.8 Procurement capability reviews will be piloted in early 2007 and rolled out across central government during the year. These will assess how far procurement in central government meets the demanding standards required to deliver value for money now and in the future. The reviews will involve the deployment of a small team of high quality experts engaging intensively with departments over a short period to assess their current operating capability within their procurement functions. Reports and departmental action plans, following the reviews, will be made public.

16 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. The Government will report on the next three-year Spending Review covering , and in 2007 and will hold Departmental allocations to the agreed figure already announced for last CSR was in 1998; Government sees CSR2007 as an opportunity to do a fundamental review of the balance and pattern of public expenditure, take stock of what investments and reforms have delivered to date and identify what further steps are needed to meet the challenges of the decade ahead; will involve a more zero-based approach to setting the capital baseline and capital budgets.

17 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.

18 Publication of Transition Guidance
Budget 2007 Publication of SoPC4 Publication of Transition Guidance Announcement of PFI Credit envelope of £11bn to support LA PFI projects Move to international reporting standards in Changes to corporate taxation incl capital allowances - P&M and IBA

19 PFI could evolve into a greater range of models
Debt underpinning (Woolwich extension, M25) Could reduce cost of borrowing by c 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) May enhance refinancing gains Risk of undermining whole life costing / innovation Service concessions (M6 toll, Thames Gateway) 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 More like PFI Less like PFI

20 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

21 Databank HM Treasury policy guidance:
Transforming Government Procurement Green Book PFI Policy VfM, standardised PFI contracts, project list (all financial data) Accounting Budget 2007

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