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Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116 THE GOOD, THE BAD AND THE AWKWARD Consideration of issues relating to in the delivery of accommodation (social infrastructure) projects through the Private Finance Initiative in the UK.

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Page 1: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

THE GOOD, THE BAD AND THE AWKWARD

Consideration of issues relating to in the delivery of accommodation (social infrastructure) projects through the Private Finance Initiative in the UK.

Page 2: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDSPECIALIST TECHNICAL ADVISOR

Since the 90’s our specialist PPP team has been at the

forefront of PPP/PFI procured projects, delivering a wide

array of services.Revenue Financed PPP Projects

Project Volume Capex

Police 1 £5m

Healthcare 29£2,859

mEducation 13 £836mHousing 2 £203mLeisure 2 £75mCivic 3 £74mAirport 1 £13mUtilities 1 £100m

TOTAL 52£4,165

m

• Public Sector Advisor

• Lender Advisor

• Operational Performance Standards

• Payment Mechanism Analysis

• Bid Manager

• Life Cycle Costing

• Operational Audits (end user, lender, FM,

Project Co)

Experience

Page 3: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDCIRITICISM OFTEN RAISED

• Not here to condone or condemn• Seek to provide honest perspective

• There are some ill conceived projects• There are some which were poorly procured• Some which are being badly administered

• Many examples of good projects• Well informed and carefully constructed• Project outcomes delivered and recognised• Good relationships

• Must not just reject PFI (one of many procurement models)

• It continues to evolve and improve

Page 4: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDNOISE

Knowledge

Style

Reality

Communication

Language

-politicians

-councillors

-contractors

-service providers

-debt providers

-equity providers

-end users

-project leaders

DisparateObjectives

Theory

Page 5: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDCOMMON FALACIES

• Design imposed by private sector upon public sector

• Low quality services [wish list, aspirations]• Privatisation of public services• Cost of replacing a light bulb• Profits of private sector• Incentivising good performance [the poor FM

provider]• Partnering and contract• Performance and relationships• Protecting public sector jobs

• TUPE• Retention of Employment

• Unnecessary facilities

Understanding where issues relate to the PFI model itself, or simply poor procurement or normal development or operational risk.

Page 6: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDDIFFICULTIES

• Equity returns• Cost of financing (sovereign debt, leverage debt,

revenue debt)• Role of FM and incentivisation• Procurement – competitive dialogue• Complexity of payment mechanism• Construction phase risk – real• How business cases are constructed:

• Affordability and value for money• Risk transfer• Increasing budgets• Central / local politics

Deductions

o FM Provider.

o Shareholders.

o Funders

Page 7: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDDIFFICULTIES

• Long term need of facility• Cost of procurement [design competition]• Local/central procurement [knowledge, experience and

skills]• Administration of the contract [achieving high quality

results]• Partnering• Know your contract• Resourcing• Do not be superficial or arbitrary

• Managing change control• Refurbishment

Page 8: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDPOSITIVES

• Quality of built environment• Handback – condition• Handback – ownership• Debt – known, serviced, with end date• Real risk transfer:

• Construction costs (good control)• Contractor insolvency• Building fabric condition

• Ring-fence maintenance and life cycle budgets• Quality of the service mandated• Investment opportunity for public sector• Procuring major projects ‘quickly’ and thoroughly• Driving excellence and innovation through procurement• Focus on core services – delivering high quality serviced

real estate• Major variations

Page 9: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDRISK TRANSFER

The UK National Audit Office in 2012,highlighted some projects where equity losses occurred. In 2004, the construction costs of several projects involving Jarvis Construction exceeded construction budget. Jarvis plc and other PFI investors (equity & debt) bore the costs of filling the £120million funding gap in projects including Whittington Hospital, Tyne and Wear fire stations, Lancaster University and Wirral Schools.

- projects with significant construction losses- facilities manager under priced

Unnecessary risk transfer, i.e. attracts premium and better if retained: insurance, change in law, areas of service.

Page 10: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDPF2 – CONTROL OF FINANCE

• private sector to provide equity return information for publication

• funding competitions for a portion of the private sector equity

• refinancing gain-sharing• capital contributions• public sector equity participation• wider mix of debt provision – more complex

capital stack

Page 11: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDPF2 – CONTROL OF FINANCE

HM Treasury: “A new approach to publicprivate partnerships” December 2012

Page 12: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDPF2 – FLEXIBLE SERVICES

HM Treasury: “A new approach to public private partnerships” December 2012

Page 13: Eddie davies

Edward Davies BSc(Hons) MSc MAPM FRICS | [email protected] | (m) 07900 004 116

PFI: THE GOOD, THE BAD AND THE AWKWARDPF2 – WHEN USED

• a major capital investment need, requiring effective management of risks associated with construction and delivery;

• a stable policy environment and long term planning horizons exist, so there is a high degree of confidence the infrastructure and services will be required throughout the life of the contract;

• the nature of the requirement allows the public sector to define its needs as service outputs that can be adequately contracted for in a way that ensures effective and accountable delivery of public services over the long term, thus ensuring risk allocation between the public and private sectors can be clearly defined and enforced;

• the nature of the assets and services identified as part of the scheme, as well as the associated risks, are capable of being costed on a whole life, long term basis;

• a slow rate of technological change – as projects involving a high IT content are unlikely to provide the stability in demand required for a PF2 approach;

• a capital investment in excess of £50m – as less capital intensive projects seldom justify the procurement and management costs involved; and

• a project is not so large or complex that the private sector is unable to bear the risks being transferred.

Reference: “Infrastructure procurement routemap: a guide to improving delivery capability”, January 2013, HM Treasury and Infrastructure UK.