The Evolution of PPP: the UK Experience

1. The Evolution of PPP:the UK Experience Owain Ellis UNCLASSIFIED

2. Agenda The UK experience Assessment of performance and lesson’s learnt A new approach to public private partnerships: PF2 UNCLASSIFIED

3. The UK experience UNCLASSIFIED

4. Key Principles of PPP Contracts for Services Authority transfers responsibility and risk for asset/service to Contractor. Contractor takes on obligations for 25 to 30 years. Contractor designs, builds, manages, maintains asset and provides services. External lenders fund Contractor. Authority pays “Unitary Charge” for available/acceptable service. The PPP Contract (and associated documents) must regulate a network of relationships. UNCLASSIFIED

5. So…The Core Characteristics of PPP are… 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 Capital at risk Fixed Price Output-based UNCLASSIFIED

6. Situation of the UK Infrastructure in the early 1990s • Legacy of under- investment • Backlog of school repairs in 1997 estimated at £7billion • Backlog of NHS building maintenance over £3billion • Constrained capital budgets • EU Commission paper on PPPs: “Whilst the principal focus of PPPs should be on promoting efficiency in public services through risk sharing and harnessing private sector expertise, they can also relieve the immediate pressure on public finances by providing an additional source of capital.” • Balance Sheet Treatment • Cost overruns – conventional procurement

7. Cost overruns Guy’s Hospital Outturn: £124m Guy’s Hospital Budget: £36m Faslane Trident Submarine Berth Outturn: £314m Faslane Trident Submarine Berth Budget: £100m Scottish Parliament Outturn: £431m Scottish Parliament Budget: £40m

8. UK Experience - PFI +800 PFI Contracts Signed £54 Billion Capital Value +700 Projects in operation Source: HM Treasruy UNCLASSIFIED

9. Signed Deals and Capital Value by Financial Year * In 2011, 27 projects worth £2.25Bn were signed Source: Projects database PUK and IUK

10. Common Sectors Transport Education Prisons Health 10 UNCLASSIFIED UNCLASSIFIED

11. Common Sectors (cont’d) Defence Leisure Government Offices Waste Treatment Also • Housing • Courts • Technology 11 UNCLASSIFIED UNCLASSIFIED

12. Public Expenditure Context PFI (PPP) represents approximately 11% of UK total public sector investment. PFI (PPP) is an important technique for procuring public services but is only one of a family of procurement methods. UNCLASSIFIED

13. Assessment of performance and lessons UNCLASSIFIED

14. Comparison with Conventional Procurement - Evidence 80% 30% Delivery on time and on budget 2008 85% + On time On budget 2005 45% + On time On budget Conventional Procurement PPP Performance of completed projects – No. of Projects Source: National Audit Office – UK Parliament – Expenditure Auditor UNCLASSIFIED

15. 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 UNCLASSIFIED

16. Lessons – what is needed for success Legislative framework Policy and accounting framework Institutional support (Treasury Taskforce, Private Finance Units, Partnerships UK, Infrastructure UK, Local Partnerships) Politics and practices Capacity building: Public sector Private sector Project/ Programme choice (sectors, characteristics) … and above all, Political Commitment UNCLASSIFIED

17. Lessons – what would we do better Refinancing Soft Services Value for Money Cancellation Dealing with opposition – 1995 to 2005 Recent criticism from political parties, Parliament and the National Audit Office UNCLASSIFIED

18. A new approach to public private partnerships: PF2 UNCLASSIFIED

19. Reform of the Private Finance Initiative UNCLASSIFIED • December 2011 the Government initiated a fundamental reassessment of the Private Finance Initiative • Broad based engagement process – all interested parties invited to respond to a call for evidence • 155 responses were received and published • 100 roundtable and bilateral engagements

20. Financial Context – global financial crisis In 2007, the credit crisis hit debt markets, initiated by loan defaults on sub-prime mortgage books. Monolines’ lost their AAA credit rating and investors ceased investing in monoline wrapped project bonds. New global regulatory standards on bank capital adequacy required banks to set aside more capital against their risk-weighted assets. As a result, the cost of long-term borrowing for infrastructure projects increased sharply and the availability of long-term bank debt materially diminished. UNCLASSIFIED

21. Funding Conditions Context to review Commercial banks – individual and club, but no syndication and number of active banks continues to fall European Investment Bank loans EU Project Bonds (for eligible projects) Capital markets funding of UK PPPs had not been active since January 2008 UNCLASSIFIED

22. A new approach to public private partnerships UNCLASSIFIED 22 • Autumn Statement 2012 the Government published full details of its new approach to public private partnerships – PF2. • Commitment to continued private sector involvement in delivering and financing public infrastructure and assets. • Well-formed partnerships have delivered benefits – driving efficiencies, getting projects built to time and to budget and creating the disciplines and incentives on the private sector to manage risk effectively

23. PFI Reform – key themes UNCLASSIFIED 23 • Introduction of public sector equity to enable a genuine partnerships between public and private sector; • Improving transparency will be at the centre of the new arrangements; • Service provision will be more flexible with certain services excluded; • Certain risks previously transferred to the private sector will now be retained by the public sector or in some cases be shared; • Procurement will be faster and less expensive, without sacrificing quality and competitiveness; • Projects will be structured to facilitate access to capital markets or other sources of long term debt finance.

24. UNCLASSIFIED

25. Conclusion The UK experience Assessment of performance and lesson’s learnt A new approach to public private partnerships: PF2 UNCLASSIFIED

26. Owain.Ellis@hmtreasury.gsi gov.uk UNCLASSIFIED

27. Additional Slides UNCLASSIFIED

28. Infrastructure UK (IUK) was officially set up in 2009 as a unit within HM Treasury, with Partnerships UK (PUK) being formally absorbed within it in 2010 • PUK, which was itself a PPP between HM Treasury and the • private sector to deliver support to procuring authorities on PPPs. • IUK’s current remit is to focus on the UK’s long-term infrastructure priorities and facilitate private sector investment over the longer term, whether it is procured through PPPs or not.

29. IUK is split into four main functions: • Infrastructure Delivery • Infrastructure Financing • PPP Policy • Assurance

30. Institutional responsibilities for PPPs in England are shared between different bodies, reflecting the maturity of the market and the level of devolution that exists. The most significant of these entities are summarised in chart to the left.

31. Objectives for the reform of PFI • A new approach to the delivery of public assets and infrastructure that: • is less expensive, uses private sector innovation to deliver services more cost effectively;  • can access a wider range of financing sources, including encouraging a stronger role to be played by pension fund investment;  • strikes a better balance between risk and reward to the private sector;  • provides greater flexibility to accommodate changing public service needs over time;  • maintains the incentive on the private sector to deliver capital projects to time and to budget and to take performance risk on the delivery of services;  • delivers an accelerated and cheaper procurement process; and  • gives greater financial transparency at all levels of the project so that the public sector is confident that it is getting what it paid for, and that the taxpayer is sure it is getting a fair deal now and over the longer term. UNCLASSIFIED

32. Public sector equity investor UNCLASSIFIED • Government co-investment as a minority shareholder; • Central unit in the Treasury; • Investment from the procuring authority/ sponsoring department; • Priced at a market rate; • Size of the stake determined on a project by project basis; • Director representation on the Board plus local level observer; • Central unit will publish an annual report.

33. Increased transparency UNCLASSIFIED • Improving transparency for a wide range of stakeholders is central to PF2. • New control total for commitments arising from off balance sheet contracts; • Publishing accessible information on current PFI and future PF2 projects; • Private sector to provide actual and forecast equity return information; • Strengthening the information provisions in contracts; • Open book approach to the lifecycle fund; • Business case approval tracker; • Observer status at project company board meetings; • Annual report on all projects where Government is a shareholder.

34. Flexible and better value for money services UNCLASSIFIED A number of measures will be introduced to improve the flexibility and value for money of service provision within new projects: • Soft services will be excluded; • Greater discretion over the inclusion of certain minor maintenance activities; • Additional flexibility to add or remove certain elective services; • Periodic efficiency reviews; • Open book approach to the lifecycle fund with surplus shared at the end of the contract; • Standardised approach to service s output specification and payment mechanism; • Greater flexibility over the programming of maintenance and the condition of assets at the end of the contract.

35. Faster and more efficient procurement UNCLASSIFIED Measures to speed up and reduce the cost of procuring projects, without sacrificing quality and competitiveness: • Robust pre-procurement approval check to ensure that projects are ready to enter procurement; • Ministerial commitment to procurement timetable; • Projects required to appoint a preferred bidder within 18 months of issuing the project OJEU; • Encouraging more centralised procurement to avoid duplication and dilution of procurement capability, and enable the benefits of repetition to be realised; • Departmental capacity plans and strengthening the mandate of Infrastructure UK.

36. Next steps and priorities UNCLASSIFIED • Priority Schools Building Programme. Five projects, first batch (Herts, Luton and Reading) - bidders’ day 28 May, OJEU in June; • Supporting EFA to develop a programme level debt financing vehicle; • Consultation in June • Shareholders’ agreement • Standard services output specification and pro-forma payment mechanism • “Lean sourcing“ procurement guidance; • Setting up central investment unit; • Support to departments and authorities assessing delivery options for projects and developing business cases; • Focus on getting projects in procurement to financial close; • Efficiency/savings reviews and support to operational projects.