PPP - Moving towards a mature debate?

The rapid expansion of the use of PFI in the United Kingdom was not underpinned by a prior analysis of the approach which best accorded primacy to the public sector’s aim for whole-life value for money in the achievement of its service delivery objectives and assessed the true nature of the risk being accepted in PFI by private sector partners and lenders.

The United Kingdom approach to PFI largely evolved through practice and the public sector failed to anticipate the evolution of the PPP market in certain key ways such as the development of secondary markets in PPP stakes and debt re-financing. Subsequent policies were developed on refinancing gain sharing, funding competitions, guidance on compensation on early termination, insurance and the Public Sector Comparator and the standard form of contract form of PFI contract has also evolved.

But none of this added up to fundamental review of PFI policy until the announcement of the review process launched in December by HM Treasury.

This review is both timely and long overdue - and the need for it is again underlined by the latest UK PFI data (to November 2011) published by the Treasury, which shows predicted future commitments on signed PFI contracts to be £242 billion between 2011/12 and 2048/49.

The key aim of the review is the development of a new model for PFI which looks to retain the benefits that successful PFI can deliver within the context of a new approach to the delivery of infrastructure which:
• Is less expensive and 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
• Has 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
• 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.

The background to the review is a series of critical reports in 2011 on the functioning of PFI in the United Kingdom, such as from the House of Commons Treasury Select Committee (“Private Finance Initiative”, August 2011), House of Commons Public Accounts Committee (“Lessons from PFI and other projects”, September 2011) and from the National Audit Office (“Lessons from PFI and other projects”, April 2011).

The scope of the review is wide ranging, with 44 questions in 13 sections with the open invitation to address any other issues considered relevant.

The sections cover the role of the private sector in delivering public infrastructure, the future role of institutional investment, the Government’s role in project funding, possible changes in the approach to debt finance, issues associated with equity investment in PFI schemes, current risk allocation in PFI contracts, current procurement and contract management practice, balancing innovation and standardisation in PFI contracts, the future of “soft” facilities in PFI contracts, value for money in “hard” facilities management, insurance of risks, flexibility within contracts and transparency associated with operational PFI contracts.

Key questions include:
• How should the use of private finance be evaluated when considering the best procurement route to deliver a public asset?
• What if any role should public sector capital play in the financing of the construction or operational phase of public assets and services?
• What is the view of respondents to an approach which financed the construction period of projects separately from the operational phase?
• What are respondents’ views on an approach that capped equity returns or that provided for public sector sharing in returns achieved above a specified level?
• Should the public sector limit the transferability of PFI equity?
• Should the public sector share in gains on sale of PFI equity, and what impact would this have on investment appetite and pricing?
• What views do stakeholders have on public sector co-investment or joint venturing alongside private sector equity?
• What further improvements could Government consider to the standard approach to PFI procurement in order to streamline the process and reduce costs, while meeting wider objectives for effective competition, accessing bidder innovation and maintaining a robust contractual framework?
• Are there particular ways in which the private and/or public sector approach to contract management can be improved in order to manage contracts more cost effectively?
• What is the right balance of output based versus standardised specification, when considering the twin objectives of accessing greater contractor innovation and reducing costs?
• Are the insurable risks of PFI projects most appropriately dealt with (a) by the private sector with a fixed cost passed through to the unitary charge, (b) by a premium risk sharing mechanism or (c) by the public sector?
• Should there be more and/or earlier break points in contracts and what would be the expected pricing impact for the public sector? Are there specific points that break points should be linked to?
• What are respondents’ views on the current approach to determining voluntary termination compensation, are there alternative approaches that should be considered, in particular should there be differentiation in compensation amounts reflecting the point at which the termination arises?
• What degree of financial transparency should be adopted for future privately financed and delivered assets and services?

And it's not only the UK where a more balanced policy debate is emerging - last week at an OECD senior PPP officials meeting three often under-emphasised issues were discussed ie:

• The relevance of inter-generational equity to PPP decisions
• The potentially pivotal role of Supreme Audit Institutions in monitoring the award and execution of PPP projects
• The importance of managing contract modifications effectively to ensure that PPP transactions continue to represent value for money.

PPP is expected to be the vehicle for which much of the cost of the EU's "Connecting Europe" will be delivered over the coming decade (estimated at between €1.5 trn and €2 trn).

So this debate is timely to ensure that value for money is secured in these projects and that these very large amounts do not become even larger because of sub-optimal procurement.