PPP Project Concepts

Edward Farquharson
James Ballingall
March 2011
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

3
What Are The Common Features Of Different PPP
Programmes?
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
4
Common Sectors

Transport Education

Prisons Health
5
Common Sectors (cont’d)

Also
Also
• Housing
Housing
Defence • Courts
Leisure
Courts
• Technology
Technology

Government Offices Waste Treatment

6
Distinction between Privatisation and
PPP?

Where
Where does
does accountability
accountability for
for
public
public services
services delivery
delivery lie?
lie?

7
Types of PPP
Who pays?
‘BOT’ Projects Public utility

Concession User

PFI model Public sector

Joint Venture*

Investment Programme Management

* Partnerships UK is an example 8
Types of PPPs…2

Variants of charging, different tunes on demand risk

e.g. real toll roads,

Feasibility of Full Economic

airports, ports?
Recovery in User Charges

e.g. rail, water?

e.g. schools, hospitals, solid

waste?

e.g. street lighting, prisons!

Demand Risk Transfer

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Privatisation, PPP, Outsourcing
Regulation Asset transfer Accountability for Private capital
service provision at risk

Privatisation Regulator to Permanent transfer Transferred to Yes

regulate pricing, of assets private party
service
PPP Terms usually in Management of Accountability Yes
the contract assets usually retained by public
returns to authority
government

Outsourcing Terms in the No - short term Accountability Limited

contract management of retained by public
assets authority

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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
€

Cash
Payment is made, regardless of service performance
Years
0 Construction Operation

(B) PFI (output-based) procurement

€

Cash
Payment is at risk to service performance
Years
Construction 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
Output Only Residual
Specification Insurance Risk Transfer Banks or
Bondholders

Public Sector SPV 90%

Entity 25 year Service Financial
Central, Regional Special Purpose
or Local Agreement Providers
Vehicle
Government 10%
Authority/NHS Company
Trust
Shareholders
Construction Facility
Contract Services
Agreement
Contract FM
or Provider

Defined Risk Financial

Investor
Transfer

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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 school can be used for teaching.
• But problem may only affect part of 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 Not SMART
Specific Refurbish or replace all dwellings on the estate Refurbish dwellings to a good
to comply with the government’s “Decent standard.
Homes” standard.

Measurable Ensure all dwellings are structurally sound, with Ensure dwellings are fit for
adequate ventilation, lighting and thermal habitation.
comfort.
Achievable Ensure heating can maintain internal Ensure internal temperature is
temperature at X degrees when outside always maintained at X
temperature is between Y degrees and Z degrees.
degrees.
Realistic Ensure faults with heating system are rectified Ensure faults with heating are
within 8 hours in business hours and 16 hours repaired within 2 hours.
outside business hours.

Timely Maintain log of faults and report every month. Provide annual report on
performance.

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So the Core Characteristics are:
• Capital at risk – Incentives to complete and
deliver on time and at cost

• Fixed Price – Certainty of whole-life costs

– Certainty of whole-life investment

• Output-based – 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
Delivery on time and on budget

2008 85% +
On time On budget
2005 80%

45% +
On time On budget
30%

Conventional
PPP
Procurement

Performance of completed projects – No. of Projects

Sources : National Audit Office – UK Parliament – Expenditure Auditor

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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

667
667 £56.6
£56.6 Billion
Billion
PFI
PFI Contracts
Contracts Capital
Capital Value
Value
Signed
Signed

590
590 Projects
Projects now
now
operational
operational

Source: HM Treasruy
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Signed PFI Deals and Capital Value by
Financial Year

Sources : PUK Projects Database

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Distribution of PPP Projects by Value -
cumulative
Environment,
Housing, 1,578
3,816
Other, 5,882
Equipment, 4,782

Accommodation,
7,178

Capital value - £m
Education, 9,949 Transport, 2
Total: £73.05 Bn
Sources : PUK Projects Database
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Distribution of PPP Projects by Number -
cumulative
Housing, 26
Environment, 58
Equipment, 37
Other, 104

Accommodation, Transport, 67
117

Total: 931
Sources : PUK Projects Database
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Education, 226
 P P P

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 Severn Crossing

• Quality Control
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