Putting it into practice – experience from the UK International Seminar on Improving the Quality of Public Investments and Public-Private Partnerships Edward Farquharson Brasilia 26 April 2005

Structure of presentation Challenge Making the right decision Making the decision right New forms of programme delivery

The challenge Scale Scope Size Situation

Sectoral distribution

Scale 666 th PFI signed last week (!) Around 1 PFI deal signed per week 450+ operational

Size distribution

Authority distribution

Process overview 100% Ability to influence outcome Strategy/programmeProcurementService delivery Assessment Time Award 0% VALUE FOR MONEY OBC - PRG FBC

OBC Deliverability check-list Value for money assessment Bankability assessment Project Management assessment Deliverability

Case study Grouped schools project Based in North London borough of 1/4m pop 10 primary schools and 1 secondary school Raise quality/some expansion Central government credit of £55m Decision to launch the project taken in Sept 2001 Most non-teaching services 30 years

Choosing the schools Do nothing/do minimum/preferred option Sufficiency Condition Suitability Project scope

Risk allocation RiskAuthorityPrivate sector Pupil numbers√ Planning√√ Design & construction √ Availability√ Vandalism√ In school hours√ Out of school hours Residual value√

Public Sector Comparator PSC £mPFI £m Amount excluding risks 63,849 Risks transferred10,369 Total74,21872,500 Difference-2.3%

New vfm guidance Embed an evidence based approach to decision making PSC used at programme level and prior to procurement start Generic VfM Model Green Book changes – e.g. optimism bias, STP of 3.5% real Qualitative assessment: –Achievability - can you contract? –Desirability - is the process justified? –Viability - competition

Bankability Market soundings with 10 prospective bidders Analysis on a whole life cost basis showed rebuild cheaper than refurbishment in 10/11 schools Output specs in accordance with Guidance for Local Authorities Financing assumptions

Affordability CostTotal over 30 years nominal £’000’s Unitary charge265,840 3 rd party income(2,306) Funded by: Central Govt Grant Funding 114,386 Local Government Sources 149,148

Project team Technical advisers Financial advisers Project Steering Group Steering Group Chair + 4 other steering group members Legal advisers Budget of £750,000:

What happened next? At OJEC 7 expressions of interest where received 3 invitations to negotiate (ITN) Standard contract terms issued at ITN Standard payment mechanism issued at ITN Change in scope Best and Final Offer for 3 bidders

The bids Price ranking (unitary charge) Quality ranking Bidder 11 £1,130k 3 Bidder 22 £1,284k 1 Bidder 33 £1,349 2

Who won?

The bids Price ranking (unitary charge) Quality ranking Bidder 11 £1,130k 3 Bidder 22 £1,284k 1 Bidder 33 £1,349 2

Timetable ForecastActual OJEC launch26 July August 2002 Appointment of preferred bidder 10 June August 2003 Commercial & financial close 17 December March 2004 Total period17 months20 months Delay3 months

Drivers Quality of the ITN: clarity of outputs Authority changes Externals: e.g. planning approvals Complexity

Final Business Case NPV of unitary charge 16.5% better than PSC 75% of risk transferred Community benefits won Good competitive tension achieved

Opportunities arise for further development of the procurement process….

Programme level PPPs Partnerships for Schools (c10%) Local Stakeholders (Schools, PCT, LSC) Local Authority Shareholders Agreement Local Education Partnership Local Authority (c10%) BSF Strategic Business Case Private Sector Partner (c80%) Strategic Partnering Agreement Local Supply Chain

PPP 2 ? Procurement and contract standardisation Removal of repeated bidding (for public and private) Estate rationalisation Construction efficiencies, through strategic partnering driving economies of scale from long term volume Off-site and modular construction Lifecycle and FM efficiencies

Has it worked? Sources National Audit Office – UK Parliament – Expenditure Auditor Delivery on time and on budget Performance of completed projects – No. of Projects PPP Conventional Procurement 80% 30% On time On budget

Performance by sector

Contract management issues Effective hand-over Importance of central support Quality of contractual arrangements Importance of a strong senior lender Refurbishment projects present challenges Benefits of a mixed approach Managing change Refinancing

Oversight National Audit Office – Central Government Audit Commission – Local Government Public Accounts Committee/Parliament Credibility is key

Some useful websites –PPP guidance, Projects Database –Guidance, Policy, Meeting the Investment Challenge –Value for money reports, lessons learnt –Local government guidance –Gateway processes

Guidance examples TN 1: How to Account for PFI transactions TN 2: How to follow EC Procurement Procedures and Advertise in the OJEU (OJEC); TN 3: How to Appoint and Manage Financial Advisers to PFI Projects; TN 4: How to Appoint and Work with a Preferred Bidder; TN 6: How to Manage the Delivery of Long Term PFI Contracts; TN 7: How to Achieve Design Quality in PFI Projects Value for Money Guidance (Replaces TN5) Standardized PFI Contracts Version 3 (SoPC3)

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