PPP Project Concepts
Transcript of PPP Project Concepts
Edward Farquharson
James Ballingall
March 2011
PPP Project Concepts
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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, Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Taiwan, Turkey, US and UK … and more ….
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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
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What Are The Common Features Of Different PPP Progr ammes?
a) Applied across a broad range of sectors
b) Mostly applies where major capital investment is required
c) Based upon long-term (e.g. greater than 10 years) arrangements
d) Private sector capital at risk to performance in the delivery of public services
e) Fixed price, output-based contracts
Hospital Regional del Bajio, Mexico
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Common Sectors
Transport Education
Prisons Health
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Common Sectors (cont’d)
Also
• Housing• Courts
• Technology
Also Also
•• HousingHousing•• CourtsCourts
•• TechnologyTechnology
Defence
Government Offices
Leisure
Waste Treatment
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Distinction between Privatisation and PPP?
Where does accountability forpublic services delivery lie?
Where does accountability forpublic services delivery lie?
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Types of PPP
* Partnerships UK is an example
Investment Programme Management
Joint Venture*
Who pays?
‘BOT’ Projects Public utility
Concession User
PFI model Public sector
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Types of PPPs…2
Demand Risk Transfer
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e.g. real toll roads, airports, ports?
e.g. rail, water?
e.g. street lighting, prisons!
e.g. schools, hospitals, solid waste?
Variants of charging, different tunes on demand risk
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Privatisation, PPP, Outsourcing
Regulation Asset transfer Accountability for service provision
Private capital at risk
Privatisation Regulator to regulate pricing, service
Permanent transfer of assets
Transferred to private party
Yes
PPP Terms usually in the contract
Management of assets usually returns to government
Accountability retained by public authority
Yes
Outsourcing Terms in the contract
No - short term management of assets
Accountability retained by public authority
Limited
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Wide Range of Procurement Models
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Why Embark on a PPP Programme?
• Reform / modernisation of public services.
• Improved value-for-money procurement 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.
Brentside School, London
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Comparing PPP with Conventional Procurement
Under conventional public sector procurement, expenditure is input-based: ie., the Government pays whether or not the
required service is delivered.
Whereas :
Under PPP, the public sector or user only pays if and to the extent the required services are delivered, year-after-year.
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Public Sector Cash Expenditure Profiles
(A) Conventional (input-based) procurement
Payment is made, regardless of service performance
0
€
Cash
YearsConstruction Operation
(B) PFI (output-based) procurement
Payment is at risk to service performance
€
Cash
YearsConstruction Operation
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Key Principles of PPP Contracts for Services (PFI)
1. Authority transfers responsibility and risk for asset / service to Contractor.
2. Contractor takes on obligations for c.20-30 years.
3. Contractor designs, builds, manages, maintains asset and provides services.
4. Lenders fund Contractor on limited recourse basis.
5. Authority pays “Unitary Charge” for available / acceptable service.
6. The PPP Contract (and associated documents) must regulate a network of relationships.
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Overview: Typical PFI Structure
InsuranceBanks or Bondholders
Construction
Contract
Facility Services
Agreement
SPV
Special Purpose
Vehicle Company
Public Sector Entity
Central, Regional or Local
Government
Authority/NHS Trust
Financial
Investor
FM Provider
90%
Contractor
25 year Service
Agreement
Defined Risk
Transfer
Output
Specification
Only Residual Risk
Transfer
10%
Financial
Providers
Shareholders
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Concept of payment for performance
• Two original types of PPP:– usage-based, e.g. toll road
– output- and availability-based, e.g. power station.
• Private sector could take usage risk for schools, prisons, hospitals but usage often depends on general public policies;
• So could the private sector just build a school, hand over to public sector, and then walk away, with public sector making deferred payment?– transfers construction risk but otherwise is just a simple loan;
– longer term design and operating risks not transferred;
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The Payment Mechanism
• Payment begins on completion – construction is funded by private sector.
• Fixed constant monthly payments – ‘Unitary Payment’.• Calculated by bidders to cover:
– Operating costs– Debt service– Equity return
• May be partially indexed for inflation
• Payment deductions for:• Unavailability• Poor service quality
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Meaning of Unavailability• Anything which makes the relevant area impossible to use under normal
specified conditions, e.g.:– lack of shelter from wind / rain / sun;
– non-compliance with legal requirements (e.g. health and safety);
– lack of lighting, heating, cooling, water;
– key equipment inoperable, e.g. PC network (if part of PPP Contract).
• System should be based on deductions from one payment rather than aggregations of payments, to allow for weighting over 100% for prolonged unavailability.
• What if space is technically unavailable but school wants to use it?– usually lower rate of deduction.
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Unavailability calculations• Availability = eg schoolcan be used for teaching.
• But problem may only affect partof the school → pro rata deduction.
• Pro rata unavailability cannot be based just on floor area, as different parts of the school will be of varying importance → system of ‘Service Units’:
Area Number Weighting Service Units
Storage rooms 5 1 5
Staff room 1 2 2
Standard classrooms 20 4 80
Laboratories, art rooms, etc. 3 6 18
Sports facilities 2 6 12
Assembly hall 1 10 10
Kitchen, dining hall 2 10 20
Total 147
• So if one classroom is out of action for one day, deduction is:1/365th of the annual payment ÷ 147 × 4
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Service Quality
• Poor cleaning does not make a school unavailable, but there have to be penalties to ensure that service standards are maintained.
• Penalties would be passed from Project Company to ‘soft’ services sub-contractor.
• But sub-contractors earn limited fees and cannot fund large penalties – cleaner could not pay for whole school being unavailable due to bad cleaning.
• Matrix of ‘Key Performance Indicators’, specifying standards in detail (but danger that outputs → inputs!).
• KPIs weighted in a similar way to availability → ‘Performance Points’.
• More Performance Points the longer it takes to fix a problem.
• Accumulation of Performance Points → payment deductions, but capped against sub-contractor’s fees.
• High accumulation of Performance Points → replacement of service sub-contractor → termination of PPP Contract (if still not remedied)
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Output Specifications: specify what is to be achieved, not how
SMART
Specific Refurbish or replace all dwellings on the estate to comply with the government’s “Decent Homes” standard.
Measurable Ensure all dwellings are structurally sound, with adequate ventilation, lighting and thermal comfort.
Achievable Ensure heating can maintain internal temperature at X degrees when outside temperature is between Y degrees and Z degrees.
Realistic Ensure faults with heating system are rectified within 8 hours in business hours and 16 hours outside business hours.
Timely Maintain log of faults and report every month.
Not SMART
Refurbish dwellings to a good standard.
Ensure dwellings are fit for habitation.
Ensure internal temperature is always maintained at X degrees.
Ensure faults with heating are repaired within 2 hours.
Provide annual report on performance.
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So the Core Characteristics are:
• Capital at risk
• Fixed Price
• Output-based
– 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’
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The Most Common Questions?
• Isn’t public sector finance cheaper and so better value for money?
• Aren’t you privatising the nation’s schools and hospitals?
• How will you keep the “public sector ethos”?
• Won’t profit get in the way of performance?
• Doesn’t it take too long?
• Aren’t bid costs too high?
• The old ways are best! West Middlesex Hospital
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Comparison with Conventional Procurement - Evidence
Sources : National Audit Office – UK Parliament – Expenditure Auditor
Delivery on time and on budget
Performance of completed projects – No. of Projects
PPPConventionalProcurement
80%
30%
On time
On time
On budget
On budget45% +
85% +20052008
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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
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UK Experience - PFI
667PFI Contracts
Signed
667PFI Contracts
Signed
£56.6 BillionCapital Value£56.6 BillionCapital Value
590 Projects nowoperational
590 Projects nowoperational
Source: HM Treasruy
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Signed PFI Deals and Capital Value by Financial Yea r
Sources : PUK Projects Database
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Distribution of PPP Projects by Value - cumulative
Sources : PUK Projects Database
Transport, 26,228
Health, 13,645
Education, 9,949
Environment, 3,816
Equipment, 4,782
Accommodation, 7,178
Housing, 1,578
Other, 5,882
Capital value - £m
Total: £73.05 Bn
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Distribution of PPP Projects by Number - cumulative
Sources : PUK Projects Database
Transport, 67
Health, 296Education, 226
Environment, 58
Equipment, 37
Accommodation, 117
Housing, 26
Other, 104
Total: 931
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PP PP PP
Public Sector Partnership Private Sector
Service Requirement Service Delivery
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Lessons Learnt
• Political Commitment
• Legislative framework
• Policy framework
• Institutional reform
• Capacity building:– Public sector– Private sector
• Central support
• Communication strategy
• Programme development
• Quality ControlSevern Crossing