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Overview of PPP

Overview of PPP. Edward Farquharson 28 September 2006. Agenda. Introduction Types of PPP UK Programme Scope Institutional Issues Does it Work? Lessons Learnt. PPPs Are Not Standardised Internationally. Each Country’s approach to PPP is:

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Overview of PPP

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  1. Overview of PPP Edward Farquharson28 September 2006

  2. Agenda • Introduction • Types of PPP • UK Programme Scope • Institutional Issues • Does it Work? • Lessons Learnt

  3. 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

  4. Relevance? ‘……a genie has been released from its bottle; the realisation that economic choices must be made based on risk-adjusted whole life costs and benefits will alter the nature of international economic competitiveness. In a sense, this is as fundamental as the discovery of gravity. When nations spend half their GDP on public services it was only a matter of time before the penny dropped…’ ‘PPP In-Depth’ - City and Financial – January 2006

  5. Scope Total public service provision ‘Hard’ infrastructure Privatizations Concessions

  6. PPPs are Not Just a Financing Tool Wider focus on issue of outcomes and procurement reform leads policy makers to address: • Project preparation, risk management and focus on whole life cost efficiencies • Sustainability - under-maintenance of public infrastructure • Value for money: optimum balance of cost and quality • Implications for institutions and processes

  7. Contract for Services - ‘PFI’ (UK) Concession Joint Venture* Investment Programme Management Types of PPP * PartnershipsUK is an example

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

  9. Sectors No. of Projects Example UK: 731 projects that have reached financial close

  10. Signed Deals and Value by Financial Year Source: PFI Strengthening Long Term Partnerships, HM Treasury

  11. Key features of PFI procurement • Output based contracts • Certainty of whole life-of-asset costings • Single point responsibility – integration / scope • Innovation • Competition • Capital at risk to long term performance • Optimal risk transfer • Private sector capital at risk to performance in the delivery of public services

  12. (A) Conventional (input-based) procurement € Cash Payment is made, regardless of service performance Years Operation Construction 0 (B) PPP (output-based) procurement € Cash Payment is at risk to service performance Years Construction Operation Comparison With Conventional Procurement

  13. Importance of the Unitary Charge • Payments apportion risk: • Availability • Performance quality • Usage / volume • Additional revenue streams (where possible) • No guarantee of return • Composite total payment

  14. Risks retained, that are transferred under PFI Total net present value of PFI Co’s unitary charges, over life of contract Public Sector Comparator Typical Profile of Net Present Cost of PSC vs. PFI NPV of PSC risk transfer NPV of PFI cash flows NPV of PFI NPV of PSC NPV of PSC cash flows • Total value of public sector delivering same outputs over life of contract • Design and build costs • Operating costs Risk retained by Authority Risk retained by Authority PFI PSC

  15. New Approaches to VfM Assessment • Quantitative analysis • Placed in context • Evidence based • Optimism bias • Qualitative tests • Contractible ‘Viability’ • Flexibility/cost • Scope for cost/time overrun savings • Innovation ‘Desirability’ • Length • Capacity ‘Achievability’ • Competition

  16. Why Embark on a PFI Programme? • Improved value-for-money procurement of public services. • Reform / modernisation 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. • Overcome capital budget constraints.

  17. Time Opportunity to Influence Project Outcome 100% Gate 5 Benefits Evaluation Gate 4 Readiness For Service Gate 3 Investment Decision Whole Life Expenditure Gate 2 Procurement Strategy Gate 1 Business Justification Gate 0 Strategic Assessment 0% Confirm Strategy Confirm Justification Competitive Procurement Contract Award In-Service Confirm Benefits Source: Office of Government Commerce

  18. Public sector capacity issues • Joining up across time • Joining up across sectors • Asymmetry in experience/skills • Market knowledge • Role of the private sector • Independent scrutiny

  19. Institutional challenges • Cuts across Government • Generic nature of issues • Resources scarce and expensive Central response

  20. UK PPP policy and implementation bodies HM Treasury PPP Policy Auditing bodies e.g. National Audit Office Other key support bodies e.g. 4ps PPP support to Local Authorities Partnerships UK PPP Implementation Partnerships for Schools PDO

  21. Policy Support Guidance, Standardisation, best practice, databases etc. Help desk Transaction Quality Control Transaction Support Investment programme management (PfH and PfS) Co-sponsoring projects (Development Partnership Agreements) Commercialisation Investments PUK Activities Programme/policy implementation Project support

  22. 80% 30% UK PFI: Evidence of Benefits Delivery on time and on budget On time On budget On time On budget Conventional Procurement PPP Performance of completed projects – No. of Projects Source: National Audit Office – UK Parliament - Expenditure Auditor

  23. 89% 77% 12% 10% 1% 0% Always Almost always About half of the time Almost never Never Service Provider Performance Performance measurement shows that the contract service levels are being achieved... Source: Report on Operational PFI Projects, PUK

  24. 40% 32% 25% 3% 0% Very good Good Satisfactory Poor Very poor Relationship Quality of day-to-day operational relationship between the public and private sector contract management teams. Source: Report on Operational PFI Projects, PUK

  25. User satisfaction Chart 1.2: Did the last user satisfaction assessment find that services were being delivered to an acceptable standard? Source: PFI Strengthening Long Term Partnerships, HM Treasury

  26. Lessons Learnt • Legislative framework • Policy framework • Institutional reform • Capacity building: • Public sector • Private sector • Central support • Communication strategy • Programme development • Quality Control • … and above all, Political Commitment

  27. edward.farquharson @partnershipsuk.org.uk +44 (0)20 7273 8040 www.partnershipsuk.org.uk

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