Canada provides an excellent example to the UK for overcoming its bias against PPPs.
Back in 2006, I watched an episode of Dispatches titled “Public Service, Private Profit.”
Let’s just say that it was a less than flattering account, arguing that public finance initiatives (PFIs) produce no benefits whatsoever other than to the profit-hungry construction companies who pocket huge gains from unsuspecting government officials. I felt that the programme, despite pointing out some valid failings of early PFI contracts, significantly misrepresented how PFI contracts are generally structured. That 45 minutes of television has stayed with me ever since.
Nearly 10 years later, I’m sad to say I feel this programme still sums up the public and political sentiment towards PFIs and Public Private Partnerships (PPPs) in the UK. Even though most of the failings raised in the programme have now been addressed, I still read articles full of venom about the use of PPP in the UK, in stark contrast to the reception this type of project financing receives in other areas of the world, such as Canada and parts of Europe (the Netherlands and Ireland, for example, being largely pro-PPP).
Also around 2006, I became conscious of Canadian PPP – which has built huge momentum ever since. Over the same period of time, PPP in the UK has moved in the opposite direction and PFI has become an obsolete, almost toxic term. I have often pondered what has made Canadian PPP so successful and what has been pulling the UK back. What is behind the positive PR that the same type of financing receives in one part of the world compared to at home?
Canada: Purveyor of powerful PPPs
Canada’s secret was taking PFI as the UK knew it and streamlining it, making the most of the discipline that PPP has in the procurement process. The Canadian approach to procurement and delivery is a lot more centralised, with government bodies in individual provinces dedicated to several tasks: identifying the province’s infrastructure requirements, deciding the best procurement model for each, implementing the procurement process and ultimately being actively involved in monitoring performance while the asset is operational. This centralised approach makes the evaluation process more standardised and efficient, conducted by organisations that have developed expertise in dealing with PPPs. Local councils in the UK don’t have the chance to get this experience, and in practice should not need to as it is not their primary role.
On a more detailed level, bids in Canada involve fully committed financing, meaning projects achieve financial close within weeks of selection of the preferred proponent. This increases transparency, reduces the procurement costs and allows the timely delivery of projects. The losing bidders are reimbursed a pre-specified amount, acknowledging the high cost of bidding and encouraging sponsors to prepare a number of committed bids, in turn ensuring competition is maintained. Marginal gains have also been made by changing the template approach to revenue streams, maintenance costs and reserve accounts.
Taken together, all of these efficiencies have delivered for Canadians a stream of success stories. In September this year, a report undertaken by the Toronto-based consultant Hanscomb revealed that 98% (44 of 45) of PPP projects undertaken by Infrastructure Ontario completed up to 31 March 2015 were delivered on budget and 73% (33 of 45) were delivered on time or within a month of substantial completion. Of the 12 delayed projects, four were behind schedule due to strike action, three due to unexpected site conditions and the remaining five due to other factors such as schedule management, changes of scope or design, or technical difficulties. Compare this to only 71% of the seven projects using traditional delivery being on budget and 86% (six out of seven) of those being delivered on time (or within a month of substantial completion). When on-time performance is measured as delivery within five business days of scheduled completion, 29% of traditional procurement projects were delivered on time versus 69% of PPP projects.
More recently, SaskBuilds (Saskatchewan’s Infrastructure Ontario equivalent) published a Value for Money report which concludes that the use of a PPP-style procurement for the Regina Bypass saved taxpayers CAD $380m (GBP £189m). The report states that the Net Present Value (NPV) of the total project cost was CAD $1.88bn, (GBP £0.91bn) compared to CAD $2.26bn (GBP £1.09bn) if it had been delivered through a traditional approach. This reflects a 16.8% saving over the 34-year contract term.
The UK’s PPP perception problem
In contrast, the stories that come to mind when I think of the UK are about the financial burden that PPP brings, the windfall refinancing gains made by the private sector, the high cost of changing a light bulb in a PFI hospital, and so on. Many of these have been structurally addressed, with developments such as the ratchet-style ‘gainshare’ mechanisms. These ensure that the majority of any refinancing gains being returned to the public sector. There have also been significant improvements in the benchmarking or exclusion of soft facilities management services.
Some of these are contract management failings on the public sector side. Contracts have been terminated on the basis that the public sector is unhappy with the service levels being provided, despite never having made the deductions it is entitled to under the contract.
Ultimately, the UK lacks that centralised approach that I believe is key to the success of these projects. The formation of Infrastructure UK a few years back looked to be a step in this direction. Despite their efforts, however, we have still seen a limited number of projects come to fruition in the UK. In mid-November, it was announced that IUK is to be merged with the Major Projects Authority. It’s reasonable to be concerned whether their remit will be moved to a few large infrastructure projects rather than a steady stream of projects of varying capital values.
PPP isn’t the only sensible approach for every infrastructure project out there. There is a balance to be found between using PPP and more traditional procurement methods. The off-balance sheet treatment of PPP projects for governments can make it akin to using a credit card, so it’s easy to see how governments can get excited about this method of procurement for the wrong reasons.
Institutional lenders on the rise
Having said that, now is a good time for some responsible ‘credit card’ use. The all-in cost of finance is at historically low levels and there aren’t obvious indications that this is about to change. We are seeing institutional investors (pension funds, insurance companies) taking an increased interest in PPP style transactions since their investment interests are naturally suited to the opportunities project financing offers. They have been developing their expertise in the area and created some strong competition for the traditional lenders. This is translating into highly competitive financing terms, all to the benefit of the public sector procurers. Hopefully, a way can be found to take advantage of these favourable conditions for continuous infrastructure investment.
Change on the horizon
The situation remains slow in the UK, but things are improving (if slowly). Scotland has for some time been using a modified version of project finance which is designed to be more politically and publicly palatable. Wales is following in its tracks. The government recently announced its plans to replace a number of prisons in England. It is not yet clear how this will be done but we might see a PPP framework being used for some of that. With a new Liberal government in Canada looking to make a big mark, there might be more useful lessons to be learnt from across the pond. I hope we in the UK will continue to take notice, and adopt new methods to help PPP earn some of the popularity it deserves.