PPP CONFERENCE HONG KONG 2005

The Exclusion of Scottish Firms in Scotland’s PFI Projects

Kirsty Hunter and Professor John Kelly

Glasgow Caledonian UniversitySchool of the Built and Natural Environment

E-mail: khu@gcal.ac.uk

Structure of PresentationA Background to the PFIPFI Projects in ScotlandThe Research ProjectResearch MethodologyIssues Identified in InterviewsBarriers to Entry The QuestionnaireThe PFI Players PFI Supply Chain InformationResultsProblems Encountered Conclusions & Further Work

A Background to the PFI

Introduced in 1992 by Conservative Gov. Extended by Labour Gov. – PPP’sTo increase involvement of private sector in the delivery of public servicesA vehicle for large scale public sector investment offering fastest rate of construction for public buildingsPublic sector uses an off balance sheet assetAchieve vfm & transfer riskControversial scheme

PFI Projects in Scotland

£2.7b investment in PFI 1998-2003 (Audit Scotland, 2002)

School Building Programme2700 primary & secondary schools1/3 of total investment

Healthcare 7/11 new hospital developments since May 1999

InfrastructureSkye Bridge, southern M74, M77, Glasgow Southern Orbital

Water1500 projects from April 2002-2006, £1.8b

Glasgow Housing Stock TransferSpending plans for £4b in next 30years

The Research ProjectFunded by the RICSApril 2004 – ongoing Assisted by the RICSInvestigate PFI players in Scotland’s projects

Quantity SurveyorsArchitectsContractorsOther members of the core construction team

“How many architectural practices, contractors, project management firms and other members of the typical core construction project team are based in Scotland?”Large national contractors south of border???

“The Treasury have a record of excluding smaller firms through restrictive PFI, prime contracting and Procure 21.”

Scottish Parliament ExampleCore Project Team

Organisation Location

Architect EMBTRMJM

Barcelona, SpainScotland

Construction Manager

Bovis Lend Lease London (Scottish Office)

Quantity Surveyor

DL&E London (Scottish Office)

Consulting Engineer

Arup London (Scottish Office)

Planning Supervisor

Turner & Townsend

London (Scottish Office)

Research Methodology

Strand A – Analysis of SE DatabaseStrand B – Investigation of the PFI JournalStrand C – Structured Interviews of Case Study ResearchStrand D – Questionnaire Survey of Construction Faculty Board MembersStrand E – Study of Single Project

Strand C: Issues Identified in Interviews

Specialist SkillsSmall number of lawyers & project managersInvolvement of council employees with non technical backgroundUse of local supply chain dependent on availability of skills

FragmentationFormation of strategic alliance / consortium

Bureaucracy & SizeNumber of regulatory bodiesLarge size of projects or bundled projectsSame contenders – PFI a specialised marketProvision of different PFI packages

Strand C: Issues Identified in Interviews

High Costs & Demands on ResourcesHigh bidding / participation costsHigh project valuesHigh financial risks Lack of credibility and contacts prevents involvementDemands on management timeCommitment to more than one PFI - pressure on resourcesAcquiring capital investment / cash flow to engage in PFIAcquiring expensive consultancy expertiseAcquiring sub-contractors - committed to other projects

Barriers to Entry

88% contractors felt there were real barriers to the PFI (Dick & Akintoye, 1996; IPFA 2002)

Lack of appropriate skillsHigh participation costsHigh project valuesHigh riskLack of credibility and contractsDemands on management time

Strand D: Questionnaire

Respondents were asked:Council area they were from PFI projects they have worked on & nature of input to projects identifiedProcuring agencies / concession companies they have been involved withTo identify any other members of the supply chain

The PFI Players

Dwindling UK interest…Treasury Review (complete – Nov 2004)Increasing overseas interest…

Bilfinger Berger (German)Hochtief (German)Bouygues (French)

Overseas interest is positive because UK interest is deteriorating???

PFI Supply Chain Information

Sector i.e. education, health ProjectSponsor / ClientSpecial Purpose Company (SPC) / ConsortiumContractorFacilties Management ProviderEngineer(s)Lenders / Debt FinancingDesignAdvisors to the Consortium i.e. financial & legalAdvisors to the Client i.e. financial, legal & technical

Sources of Information

RICS questionnaireInterviews with technical advisorsScottish Executive PFI project fact filesNational Health Service (NHS) database on projects (for health projects only)

Sector No. of Projects

Identified

No. of Projects with Information

Percentage of Projects

with Information

Health 118 82 69%Local Authority 32 16 50%Water and Sewerage

9 1 11%

Scottish Executive and its Agencies

5 2 40%

Further Education

4 3 75%

Public Sector 3 2 67%Police 1 1 100%Total 172 107 62%

Supply Chain Member Origins

Scotland, England, OverseasHead / Main office in ScotlandOffice in Scotland, Head / Main office in England or overseasBased in England or overseas onlyGlobal company – no particular head office (has office in Scotland)

Contractor Facilities Manager

Architect Legal Advisor to

Client

Financial Advisor to

Client

Technical Advisor

Balfour Beatty (7)

Gardner Merchant / Sodhexo (5)

Keppie (4) Central Legal Office (25)

PWC (23) Faithful & Gould / Atkins (8)

RoberstonGroup (5)

Roberston FM (2)

HMA/3D Holmes Partnership(3)

Dundas & Wilson (10)

Deloitte Touche (14)

Mackenzie Partnership (7)

Sir Robert McAlpine (4)

ISS Mediclean(2)

Aedas (3) Shephard & Wedderburn(8)

Ernst Young (6)

Currie & Brown (7)

Morrison (4) Initial Healthcare (2)

Young & Gault(2)

McGrigorDonald (8)

Quayle Munro (5)

CanmorePartnership (7)

James Walker (4)

HBG FM (2) HLM Design (2)

McClure Naismith (7)

Newchurch & Co (5)

Mott MacDonald (4)

HBG (4) Dumfries Facilities (2)

Fife Council (2) MacRoberts (7)

Amey (2) BLB (2) Burness (7)

Results

With exception of the legal entity, the majority of profit from Scotland’s PFI is being absorbed south of the borderBased in Scotland…

20% financial advisors29% facilities management providers33% contractors40% technical advisors43% architects

17/37 organisations publish their profits in Scotland compared to 20 in England

Problems Encountered…

Information on Scotland’s PFI projects being readily availableDatabases incompleteResponse rate in questionnaire

Few practices participating in Scottish PFI projectsKnowledge of supply chain

Conclusions & Further Work

Bidding costs & other PFI costsHuge challenges for Scottish firmsPFI is a maturing market ‘Two-tier’ marketWith exception of the legal entity, the majority of profit from Scotland’s PFI is being absorbed south of the borderInitial premise that PFI in Scotland is undertaken mainly by organisations south of the border is disproved…Very small constituency of firms operating in the PFI market in Scotland (Glasgow / Edinburgh based)Current PFI system creates a ‘vicious circle’

Recommendations on Amendments to the PFI???

Requires significant changes…PFI and non-PFI routesBespoke project contractsDifferent approach to risk allocationReserve all smaller public sector contracts for smaller companies