PPP and PFI

Peter Livesey
Senior Policy Analyst
Corporate and Private Finance

11/08/22
 UK Procurement Policy
HM Treasury
Corporate and Private
Value for Money Team Finance Team
General procurement policy PPP/PFI procurement
policy

Office of Government Commerce Departmental PFUs

General procurement practice PPP/PFI practice and sector specific policy

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 PFI has been effective procurement tool
Number and value of PFI projects by year • 2006 was biggest year so far for the
8

7
80

70
value of deals signed:
Capital Value (£ billion)

• closure of a small number of big deals

6 60

Number of projects
5 50

• progress of projects initiated 2/3 years

4 40

3 30

2 20 ago
1 10

0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
0
• Key sectors of PFI investment:
Capital Value (£ billion) No. of deals

Total capital value of projects by department

• Health - £8.3bn has delivered 64
Health - 23%
operational PFI hospitals
• Education - £4.4bn covering 836 schools
• Defence - £5.6bn in 47 projects

MoD - 16%
• Transport - £4.9bn in 46 projects (not
DfES - 12%
DfT - 16%
including tube deals)

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Project Delivery

PPP/PFI delivers benefits on time and on budget

Conventional PFI
Procurement

Projects over 73% 20%

budget

Projects late 70% 24%

Source UK National Audit Office

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 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.

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 PFI is a small part of total investment
Total investment public services
60

50
Investment (£bn)
40

30

20

10

0
1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2005-06
2004-05
PSNI Depreciation Asset sales PFI/PPP

• 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

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 What is in the £20.7bn pipeline?
Department Capital value (£m) Current status
•
Future Strategic Tanker Aircraft MoD 2506 Preferred Bidder
(FSTA)
M25 Transport 1500 Published OJEU

Defence Training Review MoD 1400 Preferred Bidder

Leicester Hospital Health 711 Preferred Bidder

Birmingham Highways Maintenance Transport 688 Published OJEU

Capital value of post-OJEU PFI pipeline split by department

6.0

5.0

4.0
Value (£ billion)

3.0

2.0

1.0

0.0

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Thames and Mersey Gateway Bridges

Thames Gateway

Mersey Gateway

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 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.

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 Whole life benefits - Street Lighting and
Highways Maintenance

BCR
3.5 high

BCR
Picture courtesy of PriceWaterhouseCoopers
2.3 high

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 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

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 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.

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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

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 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

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 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

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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

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 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.

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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.

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Budget 2007

• Publication of SoPC4
• Publication of Transition Guidance
http://www.hm-treasury.gov.uk/media/6F9/E2/
pfi_projecttransition_210307.pdf
• Announcement of PFI Credit envelope of £11bn to
support LA PFI projects
• Move to international reporting standards in 2008-09
• Changes to corporate taxation incl capital allowances -
P&M and IBA

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 PFI could evolve into a greater range of
models
•
More like PFI
• Debt underpinning (Woolwich extension, M25)
 Could reduce cost of borrowing by c. 50-70 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 Less like PFI
 Lose public sector control subject to regulation
 Will remain off balance sheet
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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

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Databank

HM Treasury policy guidance:

 Transforming Government Procurement
http://www.hm-treasury.gov.uk./media/4EA/89/government_procurement_pu147.pdf
 Green Book
http://www.hm-treasury.gov.uk/economic_data_and_tools/greenbook/data_greenbook_index.cfm
 PFI Policy
VfM, standardised PFI contracts, project list (all financial data)
http://www.hm-treasury.gov.uk/documents/public_private_partnerships/ppp_index.cfm
Accounting
http://www.hm-treasury.gov.uk/documents/public_private_partnerships/additional_guidance/ppp_general_guidance.cfm
 Budget 2007
http://www.hm-treasury.gov.uk/index.cfm

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