PPP Project Concepts

Edward Farquharson James Ballingall
March 2011

International Context
Countries with active / developing PPP programmes include: Australia, Austria, Brazil, Belgium, Bulgaria, Canada, Chile, Colombia, Cyprus, Czech Republic, Egypt, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Italy, Japan, Korea, Malaysia, Malta, Mexico, Netherlands, Nigeria, Pakistan, Peru, Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Taiwan, Turkey, US and UK … and more ….

2

PPPs Are Not Standardised Internationally
Each Country’s approach to PPP is: • Designed to meet the policy objectives of its Government • Developed to complement other public procurement and public service delivery methods • Implemented according to the available public and private sector resources

Tailored and Unique
3

What Are The Common Features Of Different PPP Programmes?
a) b) c) d) e)

Applied across a broad range of sectors Mostly applies where major capital investment is required Based upon long-term (e.g. greater than 10 years) arrangements Private sector capital at risk to performance in the delivery of public services Fixed price, output-based contracts

Hospital Regional del Bajio, Mexico
4

Common Sectors

Transport

Education

Prisons

Health
5

Common Sectors (cont’d)

Also Also

Defence

• Housing Housing • Courts Courts • Technology Technology

Leisure

Government Offices

Waste Treatment
6

Distinction between Privatisation and PPP?

Where does accountability for Where does accountability for public services delivery lie? public services delivery lie?

7

Types of PPP
‘BOT’ Projects Concession PFI model Joint Venture* Investment Programme Management
* Partnerships UK is an example
8

Who pays? Public utility User Public sector

Types of PPPs…2
Variants of charging, different tunes on demand risk
e.g. real toll roads, airports, ports?

Feasibility of Full Economic Recovery in User Charges

e.g. rail, water?

e.g. schools, hospitals, solid waste? e.g. street lighting, prisons!

Demand Risk Transfer
9

Privatisation, PPP, Outsourcing
Regulation Asset transfer Accountability for service provision Private capital at risk Yes

Privatisation

Regulator to regulate pricing, service Terms usually in the contract

Permanent transfer Transferred to of assets private party Management of assets usually returns to government No - short term management of assets Accountability retained by public authority Accountability retained by public authority

PPP

Yes

Outsourcing

Terms in the contract

Limited

10

Wide Range of Procurement Models

11

Why Embark on a PPP Programme?
• • • • • Reform / modernisation of public services. Improved value-for-money procurement of public services. Contestability in delivery of public services. Antidote to short-termism in both public and private sectors. Improved transparency of costs of public services delivery.

Brentside School, London

12

Comparing PPP with Conventional Procurement

Under conventional public sector procurement, expenditure is input-based: ie., the Government pays whether or not the required service is delivered. Whereas: Under PPP, the public sector or user only pays if and to the extent the required services are delivered, year-after-year.

13

Public Sector Cash Expenditure Profiles
(A) Conventional (input-based) procurement

Cash
0

Payment is made, regardless of service performance

Construction

Operation

Years

(B) PFI (output-based) procurement

Cash
Payment is at risk to service performance

Construction

Operation

Years
14

Key Principles of PPP Contracts for Services (PFI)
1. 2. 3. 4. 5. 6.

Authority transfers responsibility and risk for asset / service to Contractor. Contractor takes on obligations for c.20-30 years. Contractor designs, builds, manages, maintains asset and provides services. Lenders fund Contractor on limited recourse basis. Authority pays “Unitary Charge” for available / acceptable service. The PPP Contract (and associated documents) must regulate a network of relationships.
15

Overview: Typical PFI Structure
Output Specification Insurance Only Residual Risk Transfer Banks or Bondholders

Public Sector Entity Central, Regional or Local Government Authority/NHS Trust

25 year Service Agreement

SPV Special Purpose Vehicle Company

90%

Financial Providers
10%

Shareholders Construction Contract Facility Services Agreement

Contract or Financial Investor

FM Provider

Defined Risk Transfer

16

Concept of payment for performance
• Two original types of PPP:
– usage-based, e.g. toll road – output- and availability-based, e.g. power station.

• Private sector could take usage risk for schools, prisons, hospitals but

usage often depends on general public policies;
• So could the private sector just build a school, hand over to public

sector, and then walk away, with public sector making deferred payment?
– transfers construction risk but otherwise is just a simple loan; – longer term design and operating risks not transferred;

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The Payment Mechanism
• •

Payment begins on completion – construction is funded by private sector.

Fixed constant monthly payments – ‘Unitary Payment’. • Calculated by bidders to cover: – Operating costs – Debt service – Equity return • May be partially indexed for inflation Payment deductions for: • Unavailability • Poor service quality
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Meaning of Unavailability

Anything which makes the relevant area impossible to use under normal specified conditions, e.g.:
– – – – lack of shelter from wind / rain / sun; non-compliance with legal requirements (e.g. health and safety); lack of lighting, heating, cooling, water; key equipment inoperable, e.g. PC network (if part of PPP Contract).

System should be based on deductions from one payment rather than aggregations of payments, to allow for weighting over 100% for prolonged unavailability. What if space is technically unavailable but school wants to use it?
– usually lower rate of deduction.

19

Unavailability calculations
• • •

Availability = eg school can be used for teaching. But problem may only affect part of the school → pro rata deduction. Pro rata unavailability cannot be based just on floor area, as different parts of the school will be of varying importance → system of ‘Service Units’:
Area
Storage rooms Staff room Standard classrooms Laboratories, art rooms, etc. Sports facilities Assembly hall Kitchen, dining hall

Number
5 1 20 3 2 1 2

Weighting
1 2 4 6 6 10 10 Total

Service Units
5 2 80 18 12 10 20 147

So if one classroom is out of action for one day, deduction is:

1/365th of the annual payment ÷ 147 × 4
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Service Quality

Poor cleaning does not make a school unavailable, but there have to be penalties to ensure that service standards are maintained. Penalties would be passed from Project Company to ‘soft’ services sub-contractor. But sub-contractors earn limited fees and cannot fund large penalties – cleaner could not pay for whole school being unavailable due to bad cleaning. Matrix of ‘Key Performance Indicators’, specifying standards in detail (but danger that outputs → inputs!). KPIs weighted in a similar way to availability → ‘Performance Points’. More Performance Points the longer it takes to fix a problem. Accumulation of Performance Points → payment deductions, but capped against sub-contractor’s fees. High accumulation of Performance Points → replacement of service sub-contractor → termination of PPP Contract (if still not remedied)
21

• •

• • •

Output Specifications: specify what is to be achieved, not how
SMART
Specific Refurbish or replace all dwellings on the estate to comply with the government’s “Decent Homes” standard. Ensure all dwellings are structurally sound, with adequate ventilation, lighting and thermal comfort. Ensure heating can maintain internal temperature at X degrees when outside temperature is between Y degrees and Z degrees. Ensure faults with heating system are rectified within 8 hours in business hours and 16 hours outside business hours. Maintain log of faults and report every month.

Not SMART
Refurbish dwellings to a good standard. Ensure dwellings are fit for habitation. Ensure internal temperature is always maintained at X degrees. Ensure faults with heating are repaired within 2 hours. Provide annual report on performance.
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Measurable Achievable

Realistic

Timely

So the Core Characteristics are:
• Capital at risk – Incentives to complete and deliver on time and at cost – Certainty of whole-life costs – Certainty of whole-life investment – Payment relates as closely as possible to delivery of the desired ‘outcomes’ rather than of ‘inputs’

Fixed Price

Output-based

23

The Most Common Questions?
• Isn’t public sector finance cheaper and so better value for money? • Aren’t you privatising the nation’s schools and hospitals? • How will you keep the “public sector ethos”? • Won’t profit get in the way of performance? • Doesn’t it take too long? • Aren’t bid costs too high? • The old ways are best!
West Middlesex Hospital

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Comparison with Conventional Procurement Evidence
Delivery on time and on budget
On budget

2008 85% + 2005 80%

On time

On time

On budget

45% + 30%

PPP

Conventional Procurement

Performance of completed projects – No. of Projects
Sources : National Audit Office – UK Parliament – Expenditure Auditor 25

Operational Performance
• users are satisfied with the services provided by PFI projects; • 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
• evidence that PFI projects can lead to better educational outcomes

26

UK Experience - PFI
667 667 PFI Contracts PFI Contracts Signed Signed £56.6 Billion £56.6 Billion Capital Value Capital Value

590 Projects now 590 Projects now operational operational

Source: HM Treasruy 27

Signed PFI Deals and Capital Value by Financial Year

Sources : PUK Projects Database 28

Distribution of PPP Projects by Value cumulative
Environment, 3,816 Equipment, 4,782 Housing, 1,578 Other, 5,882

Accommodation, 7,178

Education, 9,949
Sources : PUK Projects Database

Capital value - £m

Transport, 2
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Total: £73.05 Bn

Distribution of PPP Projects by Number cumulative
Environment, 58 Equipment, 37 Housing, 26 Other, 104

Accommodation, 117

Transport, 67

Sources : PUK Projects Database

Total: 931
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Education, 226

P
Public Sector

P
Partnership

P
Private Sector

Service Requirement

Service Delivery

31

Lessons Learnt
• • • • • Political Commitment Legislative framework Policy framework Institutional reform Capacity building:
– Public sector – Private sector

• • • •

Central support Communication strategy Programme development Quality Control
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Severn Crossing

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