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 PFIPeter LiveseySenior Policy AnalystCorporate and Private Finance3/27/2017
1 UK Procurement Policy HM Treasury Corporate and Private Finance Team PPP/PFI procurement policyValue for Money TeamGeneral procurement policyDepartmental PFUsPPP/PFI practice and sector specific policyOffice of Government CommerceGeneral 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 dealsprogress of projects initiated 2/3 years agoKey sectors of PFI investment:Health - £8.3bn has delivered 64 operational PFI hospitalsEducation - £4.4bn covering 836 schoolsDefence - £5.6bn in 47 projectsTransport - £4.9bn in 46 projects (not including tube deals)
3 Conventional Procurement Project DeliveryPPP/PFI delivers benefits on time and on budgetConventional ProcurementPFIProjects over budget73%20%Projects late70%24%Delivering the BCRDelivering 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 investmentHMT 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 issuesPartnerships UK (45% HMT owned) provides project specific support
6 What is in the £20.7bn pipeline? DepartmentCapital value (£m)Current statusFuture Strategic Tanker Aircraft (FSTA)MoD2506Preferred BidderM25Transport1500Published OJEUDefence Training Review1400Leicester HospitalHealth711Birmingham Highways Maintenance688
7 Thames and Mersey Gateway Bridges Thames GatewayMersey GatewayTGB – public transport a priority 6 lanes 2 for public transport + walking and cyclingMGB – congestion relief
8 UK Policy - PPP/PFIAt 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 prociurementSecond in SLTPTwo mesh together when considering sustainability
9 Whole life benefits - Street Lighting and Highways Maintenance BCR3.5 highBCR2.3 highPicture courtesy of PriceWaterhouseCoopers
10 UK Policy - VfMEx-anteCapital strategy considered as part of Spending Review processSpecific investment options identified and appraised using the Green BookCapital projects prioritised within Department’s capital programmeThose areas which may be suited to procurement through PFI identified Stage 1 Programme Level AssessmentApplied to the subset of investment identified as potentially suitable for PFICentral PFU – liasing with team coordinating Spending Review submissionShould 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 projectProject team updates analysis from Stage 1 with project specific information and identifies any key VfM issuesIf 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 AssessmentContinuous 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 expertiseIncentivises whole life costing in provision of serviced assetsReal risk transfer : 90% projects completed on timeOperational satisfaction levels are high : 80% or higherHMT policy control increases contract discipline and ensures projects are well scrutinisedPFI 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 changesAdaptability to meet high level policy changesLocks 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 projectsPrivate sector returns: debt refinancing (action taken to put in place gain share arrangements), significant equity returnsPublic 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 maturityPFUs 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 DepartmentsCreating a career path for the public sector, people to follow projects as they ariseNeed to be joined up with wider procurement issues through OGCTrainingPilot course run earlier this yearWorking with PUK, 4Ps and OGC to take this furtherThe 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 assessmentBringing forward full business case prior to preferred bidder. Consistent with competitive dialogueThe 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 modelAbout people and processes/clear roles and responsibilities, making sure they are in place early on in order to efficiently procure and manage projectsRaising skills 2.4At 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.2.5The 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; andEmbedding 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.2.8Procurement 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 forlast 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 2007Publication of SoPC4Publication of Transition GuidanceAnnouncement of PFI Credit envelope of £11bn to support LA PFI projectsMove to international reporting standards inChanges 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 pointsRisks undermining contractor disciplineFlexible contract lengths e.g. contract termination / asset transfer triggered at threshold level of profit (Croydon Tram, Second Severn)May enhance refinancing gainsRisk of undermining whole life costing / innovationService concessions (M6 toll, Thames Gateway)Maintains / enhances discipline on partner (risk transfer)May undermine whole life costingAsset sales (BAA)High level of discipline on owner / total risk transfer / whole life costingLose public sector control subject to regulationWill remain off balance sheetMore like PFILess like PFI
20 M25 – Possible New Approaches Long construction period – 8 yearsLarge capital value £2bn+Innovative financing could create savingsDebt UnderpinUp-front capitalMilestone capital paymentsDebt Funding CompetitionEquity Funding Competition
21 Databank HM Treasury policy guidance: Transforming Government ProcurementGreen BookPFI PolicyVfM, standardised PFI contracts, project list (all financial data)AccountingBudget 2007