Public Private Partnerships and Construction – A Recap in HK -

Presentation to the HKIS January 2009

Dr Arthur McInnis

What is PPP?

Collaborative non-adversarial risk sharing relationship between the public and private sectors as principals Creating a partnership of an enduring natureOften sharing interests and objectives with funders and usersWith each principal contributing To achieve policy endsCreate an enhanced service delivery process and Involving the purchase of specified outputs or outcomes

PPP Internationally

70 countries taking forward PPP programmesIn 2007 UNESCAP committed countries to promoting PPPs with its Declaration on Public-Private Partnerships for Infrastructure Development in Asia and the Pacific

PSI – Key Divisions

Type Provision of Service Definition

Services Assets

Traditional Public Public Public

Outsourcing Private Public Public

PFI/PPP Private Private Public

Privatisation Private Private Private

PSI – Key Divisions

Asset Procurement Options

PublicProcurement

PublicPrivate

Partnerships

Privatisation

Traditional DBFTBOT

BOO

Publicly regulated privately owned

Source: KPMG

DBFO

PFI Delivers Better Procurement

20 Reports in the last 40 years have criticized traditional procurement including

– by Emmerson 1962– by Banwell 1964– Tavistock Institute 1966– by Wood 1976– The Department of Trade and Industry 1982– National Economic Development Office 1967,

1968, 1975, 1978, 1983, 1985– by Latham 1994 - by Tang 2001

8

Construct for Success

Tang Report – 2001– recommendation 61 – alternative procurement

Traditional Public Sector Procurement

Payment profile can be depicted as follows

Payments

Estimatedcapital

cost

Estimated running cost

Cost overruns

Running cost overruns

0Construction phase Operation & maintenance

phase

5 10 15 20

Tim

e ov

erru

ns

Years

Source: PricewaterhouseCoopers

PPP/PFI Procurement

Payment profile for the public sector:

Payments

Payment based on availability

Payment based on usage

0Construction phase Operation and

Maintenance phase

5 10 15 20

Source: PricewaterhouseCoopers

No payments

until facilities

ready

Years

PFI Procurement Lessons Now Being Extended Across Government

“Government strongly believes that many of the lessons learned from the Government’s reform of the PFI are equally appropriate to other public sector procurement, and some of the key principles established through PFI should become standard practice within the public sector, irrespective of the source of finance…The Government is therefore creating an office of Government Commerce.”

Source: HM Treasury, 2000

The Office of Government Commerce

A one stop shop deliveringa standard procurement processkey standardscommon systemskey values andbased on principles and lessons learned from PFI

PFI Procurement Delivers Value for Money

Traditional Procurement

PFIProcurement

Value/“price”

Whole life cost of procuring services

Risks retained by Public Sector

VfM

Cost of finance

Value for Money – VfM

PFI Procurement Delivers Value for Money through Risk Transfer

“Risks should be allocated to the party best able to manage them”

Public: Retained risks Shared or retained risks Private: Risks passed to supplier

Volume risk

Inflation risk

General regulatory risk

Force majeure

Detailed planning permission

Design

Construction

Commissioning

Operating performance

Project finance

Technology obsolescence

Outline planning permission

Discriminatory regulatory risk

Source: PricewaterhouseCoopers

Evidence of Value for Money - PFI is Delivering More Projects on Time

0102030405060708090

HMT PFI Research NAO PFI Research Previous non-PFIExperience

On time or early Late

Source: HM Treasury and NAO

Evidence of Value for Money – PFI is Delivering Greater Price Certainty

01020304050607080

Treasury sample -PFI

NAO sample PreviousGovernment

experience - nonPFI

For PFI, all changes to contract price involved changes in user requirements

Source: HM Treasury and NAO

Value for Money

“The lively and essential debate about the effectiveness of PFI in delivering better value for the taxpayer has been largely resolved by a series of reports from the National Audit Office, parliament’s Public Accounts Committee, and a Treasury Review published in July.”

Financial Times, 24 November 2003

Private Sector Benefits

– greater scope for doing public sector business– expertise can be used and further developed– goes to profitability– growth and job creation– leverage– increased debt capacity– lower financing costs

Public Sector Benefits

– reduces borrowing– capital freed for other expenditures– encourages public sector reform – new ways of

working and new approaches to service delivery – improves project delivery – time, cost and quality– defers payments over the contract period– improves cost estimates given robust analysis– strategic control of the project or service delivery

remains with the public sector– risk transfer to the private sector

The Public’s Benefits– earlier access to improved facilities or services– tax rates remain unaffected– higher finish standards – ability to maintain desired service standards– any savings equal more efficient use of public money– operators incentivised to deliver service standards for

whole-life of the asset– develops long-term outlooks and better understanding

of total project costs

PPP Disbenefits

Weighed against – complexity– higher transaction costs– time consuming– cost of indirect credit support– lender supervision and reporting requirements

How did PPP become part of the debate in HK?

HK Government had begun to rethink– its role and objectives– bidding/tendering process and procedures– risk management and– performance issues– in the context of financial constraints during the

Asian financial crisis and competing priorities and

PPP thus became part of the Rethinking

PPP would contribute directly to– reform of the public sector and civil service as part of

NPM– reform of the construction industry reform– reform of tendering and procurement method and– as a proven means to combine the competencies of

the public and private sectors in service delivery

In Hong Kong PPP is Part of Private Sector Involvement - PSI

PSI is defined by the Efficiency Unit as– “a strategy for improving public services by involving the private

sector in selected roles and responsibilities otherwise performed by government”

Private Sector Involvement Purchaser/Provider Agreements

Public Private Partnerships

Private Section Provision

Contracting in

Contracting out and Outsourcing

Grants and Subventions

Creating Wider Markets

Private Finance Initiative

Joint Ventures

Partnership Companies

Partnership Investments

Franchises

Privatisation

Asset sales

Shares Sales in SOEsManagement buy-outs

Market Provision of Services

Withdrawal of Public Services

Source Efficiency Unit

HK Government Policy

“We will make wider use of alternative approaches such as Public-Private Partnerships in the delivery of large scale projects under the Public Works Programme.”

Chief Executive Tung Chee Wah, 7 January, 2004

Planned but Failed HK Government Projects

– 10 LCSD Projects - Tseung Kwan O, Kwun Tong– West Kowloon Cultural District– Supermax prison on Hei Ling Chau– Shatin and Pillar Point water treatment plants– Central Police Station/Victoria prison/ redevelopment– Hong Kong Police Training College– Hospital Authority Central Food Production facility– New Infectious Disease hospital– Prince of Wales Hospital redevelopment– Kai Tak stadium– Centre for Youth Development

What went Wrong?

Approvals though will not be relevant. PPP expenditures will be more predictable. True financing and operating costs will be tabled. Further – Audit Commission and Director of Audit can review the deals.

There was a failure to respond to concerns - thatthere was no accountability

Responding to Concerns

Staff concerns can be addressed through consultation, disclosure, comparable terms and legislation if need be.

That PPP will result in civil service staff reductions

Responding to Concerns

That private sector financing costs more than the public sector

Usually though not always but the gap is narrowing. Funding costs account for only 1/3 of the project costs and value for money has to be demonstrated over and above this for projects to proceed.

Responding to Concerns

That no government or department should commit itself for 30 years at a time.

Hong Kong does though all the time with such commitments being made every day in any case with capital works expenditures. PPP actually adds flexibility to these decisions through reviews, benchmarking and market testing.

Responding to Concerns

That PPP is a sop to the private sector.

PPP should have no affect on Government or Department spending or policy priorities. Both should be set BEFORE deciding on what is a procurement mechanism.

Some lessons

Government needed– more expertise– to improve and communicate more effectively– to better protect the public interest– to better articulate the public sector role – to be more adaptable– to streamline the institutional structure– standardise the documentation – pilot some projects and– find the political commitment and support local

champions

Sources and Further Reading

Project Finance for Construction & Infrastructure, 2007HM Treasury - Standardisation of PFI Contracts – General –Revised 2002 Building Better Partnerships; Commission on Public Private PartnershipsNational Audit Office - PFI: Construction PerformanceHM Treasury - Meeting the Investment Challenge, 2003PricewaterhouseCoopers - Public Private Partnerships: A Clearer View, 2001Partnerships UK: Public Private Partnerships 2003