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2/8/2014 PPP and PFI Peter Livesey Senior Policy Analyst Corporate and Private Finance.

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Presentation on theme: "2/8/2014 PPP and PFI Peter Livesey Senior Policy Analyst Corporate and Private Finance."— Presentation transcript:

1 2/8/2014 PPP and PFI Peter Livesey Senior Policy Analyst Corporate and Private Finance

2 1 UK Procurement Policy HM Treasury Value for Money Team General procurement policy Corporate and Private Finance Team PPP/PFI procurement policy Office of Government Commerce General procurement practice Departmental PFUs PPP/PFI practice and sector specific policy

3 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)

4 3 Project Delivery Conventional Procurement PFI Projects over budget 73%20% Projects late70%24% PPP/PFI delivers benefits on time and on budget Source UK National Audit Office

5 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.

6 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

7 6 What is in the £20.7bn pipeline? DepartmentCapital value (£m)Current status Future Strategic Tanker Aircraft (FSTA) MoD2506Preferred Bidder M25Transport1500Published OJEU Defence Training Review MoD1400Preferred Bidder Leicester HospitalHealth711Preferred Bidder Birmingham Highways MaintenanceTransport688Published OJEU

8 7 Thames Gateway Mersey Gateway Thames and Mersey Gateway Bridges

9 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.

10 9 Whole life benefits - Street Lighting and Highways Maintenance Picture courtesy of PriceWaterhouseCoopers BCR 3.5 high BCR 2.3 high

11 10 UK Policy - VfM 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 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 Departments capital programme Those areas which may be suited to procurement through PFI identified

12 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.

13 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

14 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

15 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

16 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

17 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.

18 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.

19 18 Budget 2007 Publication of SoPC4 Publication of Transition Guidance pdf 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

20 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 Less like PFI More like PFI

21 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

22 21 Databank HM Treasury policy guidance: Transforming Government Procurement Green Book PFI Policy VfM, standardised PFI contracts, project list (all financial data) Accounting uidance.cfm Budget 2007

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