The schools PPP experience in the U.K . Javier Encinas October 2011

1. The schools PPP experience in the U.K.Javier EncinasOctober 2011 UNCLASSIFIED

2. Agenda PPP/PFI principles PPP/PFI in schools : Jo Richardson Community School (JRCS) UK PFI overview and lessons learnt UNCLASSIFIED

3. What are Public Private Partnerships? • ‘Arrangements typified by joint working between the public and private sectors. In their broadest sense they can cover all types of collaboration across the private-public sector interface involving collaborative working together and risk sharing to deliver policies, services and infrastructure.’ (HMT, Infrastructure Procurement: Delivering Long-Term Value, March 2008) • The Private Finance Initiative (PFI) is one type of PPP and the most common form used in the UK. This involves the procurement of specified services on a long term basis. • Typically a private sector partner designs, builds, finances, operates and maintains an infrastructure asset to provide the service. • Public sector pays annual unitary charge for 20-30 years for specified service quality.

4. 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, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Taiwan, Turkey, US and UK … and more …. 4 UNCLASSIFIED UNCLASSIFIED

5. Common Sectors Transport Education Prisons Health 5 UNCLASSIFIED UNCLASSIFIED

6. Common Sectors (cont’d) Defence Leisure Government Offices Waste Treatment Also • Housing • Courts • Technology 6 UNCLASSIFIED UNCLASSIFIED

7. Distinction between Privatisation and PPP? Where does accountability for public services delivery lie? 7 UNCLASSIFIED UNCLASSIFIED

8. Types of PPP Concession User PFI model Public sector Joint Venture* Investment Programme Management Who pays? UNCLASSIFIED * PartnershipsUK is an example

9. Types of PPPs…2 Variants of charging, different tunes on demand risk e.g. real toll roads, airports, ports? e.g. rail, water? Feasibility of Full Economic Recovery in User Charges e.g. schools, hospitals, solid waste? e.g. street lighting, prisons! Demand Risk Transfer UNCLASSIFIED

10. PPP/PFI in the education sectorCase study: Jo Richardson Community School UNCLASSIFIED

11. Types of school in England State funded 25,000 state schools Primary 5 – 11 years Secondary 11 – 16 Technical colleges 16 – 18 Universities 2,500 private schools (6-7% of children) UNCLASSIFIED

12. Schools PFI projects Education (mainly schools) is a major component of the PFI programme: approx. 225 projects signed; total value approx. £10 billion. Individual school projects too small to be economic as a PPP: mostly for ‘grouped’ schools projects: can be 20 or more schools in one project – so U.K. has more individual school projects than any other type of PPP. N.B.: A school is just one type of ‘accommodation’ PPP project: same principles can apply to, e.g., hospital, prison, offices.  UNCLASSIFIED

13. Jo Richardson Community School (JRCS) - Background Jo Richardson Community School (JRCS) is a PFI secondary school and community centre It is the first new school to be built in over 40 years in Barking and Dagenham Barking and Dagenham is one of the most deprived boroughs in London JRCS currently has 1300 students, from 11 to 18 years old 80% of the students come from deprived backgrounds UNCLASSIFIED

14. JRCS – General Objectives • The school and community centre address two important objectives: • the delivery of a new pedagogy... • School and vocational education • ...and the provision of cultural, leisure, health and learning resources for the wider community. • Adult education centre / Learning Village • Children’s Centre • Health Centre • Library • Sports and Recreation spaces • Performing Arts resources • Café UNCLASSIFIED

15. JRCS - PFI Objectives • To procure facilities that secure the Council’s education strategy and its community development and regeneration strategy • To procure school facilities that help deliver the Council’s new teaching and learning approach in particular • The procurement team learns actively from traditional/and PFI recent experience • The procurement delivers well designed, durable (expected life 50+ years) and serviceable accommodation • To develop a PFI methodology that can be taken forward by the Council • High quality vfm on outcomes

16. Project preparation process • Essential Preliminary Questions : • What are the project’s scope and requirements? • What is the best project option? • What is the best procurement option? • The Local Authority spent 18 months preparing the OBC for this project • The OBC ensures that the project: • Is social and politically responsible • Is legal and operationally feasible • Is financially affordable • Is managerially achievable • Is bankable • Achieves good risk allocation • Generates VfM UNCLASSIFIED

17. Project design process Design from the inside out (Design Council) Design that ensures: Efficient use of space Management of people Security Accesibility Client and end user involvement UNCLASSIFIED

18. Project procurement process • Objectives of a procurement process: • Run a transparent and open competition in a cost-efficient way • Select preferred bidder/partner • Achieve good outcomes • Key dates: • OJEU publication: May 2002 • Contract signature: March 2004 • School opening: September 2005 • Procurement time: 22 months • Construction period: 18 months UNCLASSIFIED

19. Project procurement process Briefing and feedback – contractors Use of exemplar designs Use of Design Quality Indicators in selection Contract award to Most Economically Advantageous Offer UNCLASSIFIED

20. JRCS - PFI private and public responsabilities Local Authority (Barking and Dagenham Council) in charge of providing : educational services to the students, extended services to the community (adult education, social integration, health, recreation) and management of shared facilities; “Soft Facilities Management” services (reception, cleaning, catering, ect) and monitoring of the “Hard Facilities Management” services performance Role of private sector partner in charge of: Design & Construction (Bouygues) Financing (BNP Paribas, DEXIA Group, NIB, Barclays Equity) Maintenance of the infrastructure / “Hard FM” services (Ecovert) · Building fabric maintenance · Mechanical & electrical engineering · Grounds maintenance · Utilities management · Health & safety management · Lifecycle fund management · Helpdesk

21. JRCS - PFI Structure Output Specification Only Residual Risk Transfer Lenders • BNP ParibasDEXIA GroupNIB Insurance 85% Public Sector Entity SPV BY Education (Barking) Ltd 25 year Service Agreement Financial Providers • Barking and Dagenham • Council (Local Authority) 15% Shareholders Construction Contract Bouygues UK Hard Facility Services Agreement Ecovert FM Bouygues Ecovert Barclays Equity Defined Risk Transfer UNCLASSIFIED

22. JRCS - PFI Risk Allocation 1/2 Risk transfer under a school PFI contract follows same principles as any PFI: Design / construction risk to Project Company So if the school is completed late or over budget no payments are made and the revenue is therefore lost. Construction sub-contractor will pay penalties to compensate. Most operating risks to Project Company: High opex / maintenance / lifecycle, or payment deductions, reduce net revenues Some risks / deductions may be passed down to soft FM contractor (as discussed), or building maintenance sub-contractor. Macro-economic risks may be shared: High interest rates reduce revenues (unless fixed or hedged). Payment mechanism may hedge against opex inflation. Insurance covers force majeure (Acts of God). UNCLASSIFIED

23. JRCS - PFI Risk Allocation 2/2 UNCLASSIFIED

24. Horseshoe layout for general teaching classrooms Doors located for teacher monitoring of corridor Clear sight lines Overhead data projector controlled from teacher’s desk Layout allows for students in wheelchairs Desks in horseshoe layout Resources stored in centre of class Windows sited to rear for IT projection Cill heights set to reduce distraction Area of room 70 – 75m2 Gaps for good circulation No student is at the back of the class – no student sits behind another

25. Delivering educational innovation for the pupils nursery entrance Student Entrance children’s centre line of security design tech food tech central street school (shared) performing arts science and art school (shared) library & ICT community entrance general teaching and SEN external sports and play general teaching and 6th form school (shared) sports student entrance UNCLASSIFIED

26. And extended services for the community line of security drop-in crèche vocational teaching café / restaurant In main street community use for adult education performing arts customer first Library / ICT learning centre pitches sports facilities used by local clubs etc cafe hard courts sport bikes all weather floodlit pitch car park

27. JRCS - Benefits so far • Construction on time and budget • Design fulfils the Authority's vision • Project delivers long term solutions • Authority has managed to establish good relations with private partner • Incentive on both sides to add value UNCLASSIFIED

28. JRCS - Challenges Defining needs appropriately User involvement Long period and cost of procurement UNCLASSIFIED

29. Educational outcomes / results % students gaining 5 or more grades A* - C GCSE National B&D 36 20 39 28 39 28 40 27 45 31 46 32 48 34 49 38 50 38 52 42 5349 + 47% +145% UNCLASSIFIED

30. The schools PFI experience in the U.K. An enormous increase in school building. approx. 225 projects signed worth approx. £10 billion Difficult to imagine it could have been achieved in another way. Some lengthy procurement periods. Projects generally completed on-time and on-budget. Exceptions relate to solvency of construction sub-contractors, but problems have been absorbed by investors / lenders, not public sector. However → delays in delivery of completed schools. Public sector needs to pay more attention to credit quality of major sub-contractors. Design quality is adequate, but limited evidence of major innovation. Good level of performance on availability (very limited deductions) Some concerns on quality of soft FM, e.g. cleaning. Concerns on long-term flexibility and the cost of change. Much adverse publicity in newspapers and TV – importance of Government communication of the benefits of the PFI programme.

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32. The UK experience UNCLASSIFIED

33. Situation of the UK Infrastructure in the 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

34. 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

35. UK Experience - PFI 964 PFI Contracts Signed £76 Billion Capital Value +750 Projects now operational Source: HM Treasruy UNCLASSIFIED

36. Signed Deals and Capital Value by Financial Year In 2010, 33 projects worth £2.9 Bn closed Source: PUK Projects Database UNCLASSIFIED

37. Distribution of PPP Projects by Value Capital value - £m Total: £76.05 Bn Source: PUK Projects Database UNCLASSIFIED

38. Distribution of PPP Projects by Number Total: 964 Source: PUK Projects Database UNCLASSIFIED

39. 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

40. 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

41. 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

42. P P P Private Sector Partnership Public Sector Service Requirement Service Delivery UNCLASSIFIED

43. Lessons Learnt Legislative framework Policy framework Institutional reform Capacity building: Public sector Private sector Central support Communications Programme development Quality Control … and above all, Political Commitment UNCLASSIFIED

44. Infrastructure UK Contact: Javier.Encinas@hmtreasury.gsi.gov.uk 44 (0) 20 7270 1347 www.hm-treasury.gov.uk UNCLASSIFIED