SMART Seminar Series: The progress and performance of UK PFI

PPP in the UK – empirics in PFI operational social infrastructure

Alex Murray, Teaching Fellow Bartlett School of Construction and Project Management, UCL SMART, Wollongong, July 13th, 2015

CLICK TO EDIT RUNNING TITLE STYLE


•  Context •  Theory •  Empirics of operations

–  Hospitals –  Schools –  SPV financials

•  Conclusions

Contents





•  Conclusions

Contents



PFI as a form of PPP (Public Private Partnership)

•  ‘Integrated’ public procurement

•  DBFO with CAPEX & OPEX allocated by one agent, the SPV (Special Purpose Vehicle)

•  Relatively small proportion of fixed capital investment nationally (despite attention)

•  >700 signed projects as of March 2013 •  £9.6bn of annual Govt. liabs. in 2013/14

Recently reformed to create PF2 •  Increased equity (now 15% from 10%) •  No soft FM (implications for WLC?) •  Little used recently except few schools projects

(Source: Akinytoye et al., 2001)

Context: UK PFI – Private Finance Initiative



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1992" 1997" 2002" 2007" 2012" 2017" 2022" 2027" 2032" 2037" 2042" 2047"

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Total"financial"close"capital"value"(all"PFI)" Healthcare"financial"close"capital"value"

Total"UC's"liable"(all"PFI)" Healthcare"UC's"liable"

PFI in healthcare investment (DoH)

Source: PFI signed projects list, March 2013. HM Treasury. * Nominal values



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ts#(£

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#(£bn

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UC#liabili4es#and#Capital#value#at#financial#close#UK#Dept.#of#Educa4on#PFI#contracts#(1992#E#2050)#

Total"financial"close"capital"value"(all"PFI)" EducaAon"financial"close"capital"value"

Total"UC's"liable"(all"PFI)" EducaAon"UC's"liable"

Source: PFI signed projects list, March 2013. HM Treasury. * Nominal values

PFI in education investment (DoE)



Context – need for good benchmarking

“We have yet to come across truly robust and systematic evaluation of the use of private

finance built into PPPs at either a project or programme level. The systems are not in place

to collect comparable data from similar projects using different procurement routes. Unless such systems are established, together with robust evaluation of the overall whole-life

costs of alternative forms of procurement, Government cannot satisfy itself that private

finance represents the best VFM option.” Private Finance Projects – A Paper for the Lords Economic Affairs Committee, National Audit Office, 2009, page 8





•  Conclusions

Contents



Whole life cost (WLC) of serviced infrastructure Point A: Conv. Procurement (DB + O) with in-house operations Point B: Conv. procurement with outsourced operations 2 main reasons for potential reduction in WLC

1.  Competition reduces waste: ê x-inefficiency ü  Allows move of A - B by ê slack & marginal é investment in operations

Contractible output ‘x’ isoquant

OPQ (quantity)

CAPQ (quantity)

Isocost (Present Value)

mor

e in

put o

f con

stru

ctio

n re

sour

ce p

er m

2

more input of operation resource per m2

CAPEX constraint B

A

Whole life cost & performance – constrained optimisation



DBFO and WLC – integrated procurement

Contractible output ‘x’ isoquant

OPQ (quantity)

CAPQ (quantity)

Isocost (Present Value)

mor

e in

put o

f con

stru

ctio

n re

sour

ce p

er m

2

more input of operation resource per m2

CAPEX constraint BC

2. Integrating DB&O allows constrained optimisation of WLC ü  Allows move from B - C without CAPEX constraint

Point C: Integrated design, build & operation (DBO) Summary: •  There are efficiencies to be had from ‘bundling’ DB&O •  Integration, as in PFI, provides opportunity and incentive

to realise these over the contract life, minimising WLC •  Previously externalities – separation of build & operation





•  Conclusions

Contents



Operating healthcare infrastructure (KPMG, 2010)

•  Research findings: –  No difference in cost of cleaning & PFI

less variable (more cost certainty)

–  PFI hospitals have higher cleanliness scores – better services?

–  PFI hospitals have better patient environments ratings – better buildings?

–  PFI hospitals have better food ratings –  BUT, scope of contract!

•  Some not fully integrated



Cost of cleaning - (£s m2) by procurement method

30

32

34

36

38

40

42

2004/05 2005/06 2006/07 2007/08

£ / m

2

Non-‐PFI PFI

106 16 103 21 105 31 95 37



Cost of cleaning (£s m2) by procurement method



Cleanliness scores (%) as determined by NHS

86

88

90

92

94

2004/05 2005/06 2006/07 2007/08

Clea

nliness score (%

)

Non-‐PFI PFI

68 11 96 19 110 32 96 39

* *



Patient environment ratings (1-5) – as measured by NPSA

2005 2006 2007 2008

* *

0

10

20

30

40

50

60

70

<=3 4 5 <=3 4 5 <=3 4 5 <=3 4 5

% o

f sam

ple

Non-PFI PFI

* Non-PFI = 83 PFI = 15

Non-PFI = 93 PFI = 20





Cost per patient meal day (£s, 2010 prices)

5

6

7

8

9

2004/05 2005/06 2006/07 2007/08

£ pe

r pat

ient

mea

l day

Non-PFI PFI

83 14 90 20 96 30 84 36



Food ratings (1-5) – as measured by NPSA

0

10

20

30

40

50

60

70

< =3 4 5 < =3 4 5 < =3 4 5 < =3 4 5

% of sam

ple

Non-‐PFI PF I2005 2006 2007 2008





* *



Hard FM expenditure (£s m2) – NHS reported

0

10

20

30

40

2004/05 2005/06 2006/07 2007/08

£ / m

2

Non-‐PFI PFI

37 16 8 3 13 8 13 13



Backlog maintenance (£s m2) – NHS reported

0

1

2

3

133

134

2004/05 2005/06 2006/07 2007/08

£ / m

2

Non-PFI PFI

35 16 8 3 13 8 13 13



National Audit Office study of PFI hospital contracts (2010)

•  PFI performs well but broadly similar to Non-PFI operations –  No difference in performance

•  Uses scope of PFI contract data to control for non-PFI provision

•  We accessed data via FOI –  Access contract scope data



The Infrastructure Forum report (2013)

•  Public vs private analysis

–  Similar cleaning cost & performance

–  Patient environments slightly better in private

–  Significantly cheaper catering with private provision

–  No worse (slightly better) quality with private provision



Cleaning cost (£s m2) - input

Cleaning cost Public Private £/m2 per annum 39.72 43.68 St. Dev. 15.81 16.42 Sample size 57 49

p = 0.208



Cleaning performance (%) - output

Cleanliness Public Private NHS NSC score % 92.10 92.07 St. Dev. 5.88 6.62 Sample size 62 53

p = 0.982



Patient environment ratings (1-5) - output Patient Env. ratings Public (% of n) Private (% of n) 5 - Excellent 21.3% 36.5% 4 - Good 54.1% 50.0% 3 - Acceptable 24.6% 13.5% Sample size 61 52

p = 0.124



Catering cost (£s per patient meal day) - input

Catering cost Public Private Cost per patient meal day (£) 8.81 6.55 St. Dev. 3.77 3.01 Sample size 54 49

p = 0.001



Food ratings (1-5) - output

Food ratings Public (% of n) Private (% of n) 5 - Excellent 53.6% 66.0% 4 - Good 41.1% 32.1% 3 - Acceptable 5.4% 1.9% Sample size 56 53

p = 0.332





•  Conclusions

Contents



The impact of schools renewal (KPMG, 2010)

•  Research findings –  PFI renewed & operated schools have

stat. sig. higher rate of educational attainment increase post investment

–  There is no difference in the operational cost of FM services between both:

•  PFI & Non-PFI •  Rebuilt & refurbished



Educational attainment in renewed schools relative to national average

n = 151 schools



Educational attainment in renewed schools relative to national average by procurement method

Non-PFI n = 79 schools

PFI n = 72 schools



Educational attainment in renewed schools relative to national average by construction type

Refurbished n = 83 schools

Rebuilt n = 68 schools



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Outcomes – educational attainment

•  Investing in improvements in Human Capital –  With associated longer run pay-offs: é productivity (é taxes)

n = 84



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•  As time passes, with data collation processes in place, the potential for insight into causal links will improve!

Outcomes – educational attainment

n = 23



Cost and value ratios paper (BRI Journal, 2015)

•  Cost & value ratios: not 1/5/200, rather… •  1 Const. / 1 Ops. / 5 Staff •  Importantly helps focus efforts

for cost saving innovation •  Value:

“Findings suggest the present value of future tax revenues alone do justify

investing in school rebuilding. Average economic returns are positive but

highly variable, with high dispersion in expected benefits.”



Attributed to 1st Viscount Leverhulme, founder of Lever Brothers (1851-1925)

•  Point being?? – focus resources on highest propensity for impact projects

Outcomes – wage uplifts & tax returns

“Half the money I spend on advertising is wasted; the trouble is I don't know which half”.

Source: Graham Ive, Alex Murray & Richard Marsh (2015): Cost and value ratios of operating renewed English secondary schools, Building Research & Information.



Operational services basket costs (2010 prices) for renewed schools by procurement method





•  Conclusions

Contents



Return on Capital Employed – PBIT / Capital Employed

•  Real measure of return – volatile & needs work! •  The market should normalise this between industries

–  risk transfer with negative values???



Annual Debt Service Cover ratio – PBIT / Interest paid

•  SPVs honouring their debt liabs. (high as 90% of K (=D+E) •  Imperfect measure: interest paid rather than interest due

–  Need financial models behind projects (commercially confidential)





•  Conclusions

Contents



Conclusions

•  PFI works in some areas / projects but not all - mixed bag! –  Not as expensive as some might say – what is the comparator?

•  The jury is still out – despite outright criticisms of PFI –  Opponents rarely acknowledge right ‘benchmark’ – conventional! –  Many philosophically opposed – unions, anti privatisation lobby!

•  My view: diff. projects should adopt diff. procurement routes –  But hard when central governments mandated use of PFI in UK

•  Role of private capital in public projects is here to stay –  Clients need to get smarter & think more about project outcomes –  Private sector need behave themselves or stifle future pipeline

Questions???

Alex Murray – Teaching Fellow

+44 (0) 20 3108 3961 +44 (0) 770 860 1634 [email protected]

Presentations & Public Speaking

SMART Seminar Series: The progress and performance of UK PFI