An Introduction to Public Private Partnerships Why Government

An Introduction to Public Private Partnerships: Why Government needs to work with the private sector Vilnius 22 nd November 2006 Stephen Harris - Head, International IFSL Chairman: UKTI PPP EXPORT GROUP

PPP is About • • Better procurement Public sector reform Better strategic planning Building and maintaining good infrastructure • Better services for the taxpayer • Sharing of risks between most appropriate parties • Public and private sectors working together

PPP is not: • • • Free infrastructure Just about finance Just building infrastructure Just about involving the private sector Privatisation, simple concessions, outsourcing or property development • A method to make a bad project good

Characteristics of PPP • Contractual arrangement between the public sector organisation & private sector provider • To deliver a service -usually a new asset • Output not input specification • Integrate design, construction and maintenance • Contractor/operator finances investment • Cost effective allocation of risks • Over a long term

Characteristics of PPP • Payment mechanism designed to ensure delivery and performance • Contract can terminate for nonperformance • Penalties for not meeting contract terms • Government retains reponsibility for ensuring service delivery to agreed standard • Assets revert to Public body at end of contract - For letting out on another PPP - Or operating by Public body

Why do countries need to involve the private sector? • Governments seeing lack of funds for new infrastructure • Pressure on tax base – Traditional routes for raising finance not enough • Governments don’t maintain existing infrastructure • Economic growth leads to demands for new infrastructure

• Leads to: Infrastructure gap – Can’t afford new infrastructure – Existing infrastructure deteriorating • Result: Poor Services for the public Value of Infrastructure In real terms Demand (GDP – led) Infrastructure Gap Supply (net investment) Time

Governments need to: • Build new infrastructure • Maintain new and existing infrastructure to a consistent standard • PPP provides: • Provision of assets or services otherwise unavailable • Better integration of operation and maintenance with design • A whole life approach to delivering services • A fairer way to raise money from the taxpayer • Result: Better services to the public in the long term

Problems of traditional procurement • • • Adversarial approach to contracts Lowest bidder wins Requirements ill-defined/changes Cost / time overruns-poor value for money Limited innovation in design or operation May not exploit third party revenue Focus on infrastructure not service Unnecessary retention of risk Poor strategic approach

Cost and Time Overruns

Holyrood Horror -The Scottish Parliament • Original budget estimate(1997)-£ 10 -20 m • Original completion date estimate-July 2001

Holyrood Horror – The Costs

UK PPP: Evidence of Benefits Delivery on time and on budget 80% On time On budget On time PPP On budget Conventional Procurement Performance of completed projects – No. of Projects Source: National Audit Office – UK Parliament - Expenditure Auditor 30%

Asset deterioration 40% drop in quality € 1 for renovation here will cost $€ here 12. 5% of life

$ millions Benefits of proper maintenance Years

Problems of working with the private sector • PPP should be a Partnership • Public and Private sectors have very different drivers • Many relationships between public and private sectors are unbalanced • Problems caused by: – Lack of understanding of other party’s key drivers – Lack of equality in bargaining power

Problems of working with the private sector • We see the result in many privatisation, concessions and outsourcing deals – “bad” deal damages image – Fall out can make investors wary of market • A PPP programme should aim to give more balance – Between public sector, private sector and citizen • PPP gives Government more control • Government is responsible

PPP: Benefits • Value for Money/cost savings • Strengthens Infrastructure • A whole life approach to delivering services • Better mobilisation of Capital • Provides assets or services otherwise unavailable • Innovation • Elimination of cost overruns • Maintenance of assets to a high standard • Creates new business sector • Transfer of risk and accountability to private sector • Fairer finance burden on citizen

PPP Issues for Public Sector • Loss of control of service – Accountability remains • Introduction of business ethic in service provision • PPP projects take longer to procure • Commitment to long term agreement • Change in procurement practice • Integration with remaining publicly run services • Inexperience of public sector in monitoring and control • Union resistance

Service Provider Performance measurement shows that the contract service levels are being achieved. . . 89% 77% 12% 10% 1% Source: Report on Operational PFI Projects, PUK 0%

User satisfaction …and users are satisfied with the standard of services being delivered 79% 65% 20% 14% 1% Source: Report on Operational PFI Projects, PUK 0%

Key relationships for the Public Sector • Selection of Advisors – Experienced advisors – Legal, Financial and Technical advisors – Mentor-type advisors • Private Sector delivery partner – International confidence – Number of players important to investors – Best not cheapest • Public concern over relationship – Quality of solution – Transparency of bidder selection

Importance of Training • Training and mentoring the public sector is a key role for: – The national, ministerial or municipal PPP unit – a private sector consultant • Developing internal capacity – Retaining expertise

How can IFSL Help? • Organising Workshops/Seminars locally • Organising visits to the UK • Facilitating training – IFSL modular courses locally • For public sector • For private sector

s. harris@ifsl. org. uk +44 (0)20 7213 9109 www. ifsl. org. uk