The schools PPP experience in the U.K.

Javier EncinasOctober 2011

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Agenda

• PPP/PFI principles

• PPP/PFI in schools : Jo Richardson Community School (JRCS)

• UK PFI overview and lessons learnt

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What are Public Private Partnerships?• ‘Arrangements typified by joint working between the public and private sectors. In their

broadest sense they can cover all types of collaboration across the private-public sector interface involving collaborative working together and risk sharing to deliver policies, services and infrastructure.’ (HMT, Infrastructure Procurement: Delivering Long-Term Value, March 2008)

•The Private Finance Initiative (PFI) is one type of PPP and the most common form used in the UK. This involves the procurement of specified services on a long term basis.

•Typically a private sector partner designs, builds, finances, operates and maintains an infrastructure asset to provide the service.

•Public sector pays annual unitary charge for 20-30 years for specified service quality.

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International Context

Countries with active / developing PPP programmes include:

Australia, Austria, Brazil, Belgium, Bulgaria, Canada, Chile, Colombia,

Cyprus, Czech Republic, Egypt, France, Germany, Greece, Hungary, India,

Indonesia, Ireland, Italy, Japan, Korea, Malaysia, Malta, Mexico,

Netherlands, Nigeria, Pakistan, Peru, Poland, Portugal, Romania, Russia,

Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, Spain,

Taiwan, Turkey, US and UK … and more ….

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Common Sectors

Transport Education

Prisons HealthUNCLASSIFIEDUNCLASSIFIED

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Common Sectors (cont’d)

Also Also

• HousingHousing• CourtsCourts

• TechnologyTechnology

Also Also

• HousingHousing• CourtsCourts

• TechnologyTechnology

Defence

Government Offices

Leisure

Waste TreatmentUNCLASSIFIEDUNCLASSIFIED

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Distinction between Privatisation and PPP?

Where does accountability forpublic services delivery lie?

Where does accountability forpublic services delivery lie?

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Types of PPP

* Partnerships UK is an example

Investment Programme Management

Joint Venture*

Who pays?

Concession User

PFI model Public sector

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Types of PPPs…2

Demand Risk Transfer

Fea

sibi

lity

of F

ull E

cono

mic

R

ecov

ery

in U

ser

Cha

rges

e.g. real toll roads, airports, ports?

e.g. rail, water?

e.g. street lighting, prisons!

e.g. schools, hospitals, solid waste?

Variants of charging, different tunes on demand risk

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PPP/PFI in the education sector

Case study: Jo Richardson Community

School

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25,000 state schools

Primary 5 – 11 years

Secondary 11 – 16

Technical colleges 16 – 18

Universities

2,500 private schools (6-7% of children)

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State funded

Types of school in England

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Schools PFI projects

• Education (mainly schools) is a major component of the PFI programme:

– approx. 225 projects signed;

– total value approx. £10 billion.

• Individual school projects too small to be economic as a PPP:

mostly for ‘grouped’ schools projects: can be 20 or more schools in one project – so U.K. has more individual school projects than any other type of PPP.

• N.B.: A school is just one type of ‘accommodation’ PPP project: same principles can apply to, e.g., hospital, prison, offices.

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Jo Richardson Community School (JRCS) - Background

• Jo Richardson Community School (JRCS) is a PFI secondary school and community centre

• It is the first new school to be built in over 40 years in Barking and Dagenham

– Barking and Dagenham is one of the most deprived boroughs in London

• JRCS currently has 1300 students, from 11 to 18 years old

– 80% of the students come from deprived backgrounds

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The school and community centre address two important objectives:

• the delivery of a new pedagogy...• School and vocational education

• ...and the provision of cultural, leisure, health and learning resources for the wider community. • Adult education centre / Learning Village• Children’s Centre• Health Centre• Library• Sports and Recreation spaces• Performing Arts resources• Café

JRCS – General Objectives

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• To procure facilities that secure the Council’s education strategy and its community development and regeneration strategy

• To procure school facilities that help deliver the Council’s new teaching and learning approach in particular

• The procurement team learns actively from traditional/and PFI recent experience

• The procurement delivers well designed, durable (expected life 50+ years) and serviceable accommodation

• To develop a PFI methodology that can be taken forward by the Council

• High quality vfm on outcomes

JRCS - PFI Objectives

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Project preparation process

• Essential Preliminary Questions : • What are the project’s scope and

requirements?• What is the best project option? • What is the best procurement

option?

• The Local Authority spent 18 months preparing the OBC for this project

• The OBC ensures that the project:• Is social and politically responsible• Is legal and operationally feasible• Is financially affordable• Is managerially achievable• Is bankable• Achieves good risk allocation • Generates VfM

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• Design from the inside out (Design Council)

• Design that ensures:

• Efficient use of space

• Management of people

• Security

• Accesibility

• Client and end user involvement

Project design process

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Project procurement process

• Objectives of a procurement process:

• Run a transparent and open competition in a cost-efficient way

• Select preferred bidder/partner • Achieve good outcomes

• Key dates:• OJEU publication: May

2002• Contract signature: March 2004• School opening:

September 2005• Procurement time: 22

months• Construction period: 18

months

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• Briefing and feedback – contractors

• Use of exemplar designs

• Use of Design Quality Indicators in selection

• Contract award to Most Economically

Advantageous Offer

Project procurement process

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• Local Authority (Barking and Dagenham Council) in charge of providing :• educational services to the students,• extended services to the community (adult education, social integration, health, recreation) and management of shared facilities;•“Soft Facilities Management” services (reception, cleaning, catering, ect) and • monitoring of the “Hard Facilities Management” services performance

• Role of private sector partner in charge of:• Design & Construction (Bouygues) • Financing (BNP Paribas, DEXIA Group, NIB, Barclays Equity)• Maintenance of the infrastructure / “Hard FM” services (Ecovert)

· Building fabric maintenance

· Mechanical & electrical engineering

· Grounds maintenance

· Utilities management

· Health & safety management

· Lifecycle fund management

· Helpdesk

•

JRCS - PFI private and public responsabilities

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JRCS - PFI Structure

InsuranceLenders

BNP ParibasDEXIA Group

NIB

Construction Contract

Bouygues UK

Hard Facility Services

Agreement

Ecovert FM

SPV

BY Education (Barking) Ltd

Public Sector Entity

Barking and DagenhamCouncil (Local Authority)

Barclays Equity

Ecovert

85%

Bouygues

25 year Service

Agreement

Defined Risk Transfer

Output Specification

Only Residual Risk Transfer

15%

Financial

Providers

Shareholders

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Risk transfer under a school PFI contract follows same principles as any PFI:•Design / construction risk to Project Company

•So if the school is completed late or over budget no payments are made and the revenue is therefore lost.•Construction sub-contractor will pay penalties to compensate.

•Most operating risks to Project Company:•High opex / maintenance / lifecycle, or payment deductions, reduce net revenues•Some risks / deductions may be passed down to soft FM contractor (as discussed), or building maintenance sub-contractor.

•Macro-economic risks may be shared:•High interest rates reduce revenues (unless fixed or hedged).•Payment mechanism may hedge against opex inflation.

Insurance covers force majeure (Acts of God).

JRCS - PFI Risk Allocation 1/2

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JRCS - PFI Risk Allocation 2/2

Risk Authority Private Sector

Pupil numbers √

Detailed planning √

Site availability √

Design & construction √

Force majeure √ √

Vandalism √ √

Availability √

Inflation √ √

Interest rates √

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Clear sight lines

Overhead data projector controlled from teacher’s desk

Desks in horseshoe layout

Windows sited to rear for IT projection

Cill heights set to reduce distraction

Doors located for teacher monitoring of corridor

Layout allows for students in wheelchairs

Resources stored in centre of class

Gaps for good circulation

Area of room 70 – 75m2

No student is at the back of the class – no student sits behind another

Horseshoe layout for general teaching classrooms

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nursery entrance

children’s centre

design techfood tech

science and art

general teaching and SEN

general teaching and 6th form

external sports and play

Student Entrance

line of security

school (shared) performing artsschool (shared) library & ICTcommunity entrance

school (shared) sports

student entrance

cen

tral s

treet

Delivering educational innovation for the pupils

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And extended services for the community

drop-in crèche

bikes

car park

café / restaurantIn main street

customer firstLibrary / ICTlearning centre

cafe

community use for adult education

sports facilities used by local clubs etc

all weather floodlit pitch

hard courts

pitches

line of security

sport

vocational teaching

performing arts

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• Construction on time and budget

• Design fulfils the Authority's vision

• Project delivers long term solutions

• Authority has managed to establish good relations with private partner

• Incentive on both sides to add value

JRCS - Benefits so far

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• Defining needs appropriately

• User involvement

• Long period and cost of procurement

JRCS - Challenges

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National B&D 36 20 39 28 39 28 40 27 45 31 46 32 48 34 49 38 50 38 52 42 53 49+ 47% +145%

% students gaining 5 or more grades A* - C GCSE

Educational outcomes / results

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The schools PFI experience in the U.K.• An enormous increase in school building.

– approx. 225 projects signed worth approx. £10 billion– Difficult to imagine it could have been achieved in another way.

• Some lengthy procurement periods.

• Projects generally completed on-time and on-budget.– Exceptions relate to solvency of construction sub-contractors, but problems have been

absorbed by investors / lenders, not public sector. However → delays in delivery of completed schools. Public sector needs to pay more attention to credit quality of major sub-contractors.

• Design quality is adequate, but limited evidence of major innovation.

• Good level of performance on availability (very limited deductions)

• Some concerns on quality of soft FM, e.g. cleaning.

• Concerns on long-term flexibility and the cost of change.

• Much adverse publicity in newspapers and TV – importance of Government communication of the benefits of the PFI programme.

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The UK experience

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Situation of the UK Infrastructure in the 1990s•Legacy of under- investment

• Backlog of school repairs in 1997 estimated at £7billion• Backlog of NHS building maintenance over £3billion

•Constrained capital budgets•EU Commission paper on PPPs: “Whilst the principal focus of PPPs should be on promoting efficiency in public services through risk sharing and harnessing private sector expertise, they can also relieve the immediate pressure on public finances by providing an additional source of capital.”

• Balance Sheet Treatment

•Cost overruns – conventional procurement

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Cost overruns Guy’s Hospital

Budget: £36m

Guy’s Hospital

Outturn: £124m

Faslane Trident Submarine Berth

Budget: £100m

Faslane Trident Submarine Berth

Outturn: £314m

Scottish Parliament

Budget: £40m

Scottish Parliament

Outturn: £431m

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UK Experience - PFI

964PFI Contracts

Signed

964PFI Contracts

Signed

£76 BillionCapital Value£76 Billion

Capital Value

+750 Projects nowoperational

+750 Projects nowoperational

Source: HM Treasruy UNCLASSIFIED

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Signed Deals and Capital Value by Financial Year

Source: PUK Projects DatabaseUNCLASSIFIED

In 2010, 33 projects worth £2.9 Bn closed

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Distribution of PPP Projects by Value

Transport, 26,228

Health, 13,645

Education, 9,949

Environment, 3,816

Equipment, 4,782

Accomodation, 7,178

Housing, 1,578

Other, 5,882

Capital value - £m

Total: £76.05 BnSource: PUK Projects Database

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Total: 964

Distribution of PPP Projects by Number

Transport, 67

Health, 296

Education, 226

Environment, 58

Equipment, 37

Accomodation, 117

Housing, 26 Other, 104

Source: PUK Projects DatabaseUNCLASSIFIED

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Comparison with Conventional Procurement - Evidence

Source: National Audit Office – UK Parliament – Expenditure Auditor

Delivery on time and on budget

Performance of completed projects – No. of Projects

PPP ConventionalProcurement

80%

30%

On time

On time

On budget

On budget45% +

85% +20052008

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Operational Performance

• users are satisfied with the services provided by PFI projects;

• PFI is delivering the services required with over 90% of public service

managers believing that services provided are satisfactory or better;

• the incentivisation within PFI contracts is working with the payment

mechanism improving the service being provided in the PFI projects

• evidence that PFI projects can lead to better educational outcomes

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Public Expenditure Context

PFI (PPP) represents approximately 11% of UK total public

sector investment.

PFI (PPP) represents approximately 11% of UK total public

sector investment.

PFI (PPP) is an important technique for procuring public

services but is only one of a family of procurement methods.

PFI (PPP) is an important technique for procuring public

services but is only one of a family of procurement methods.

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PP PP PP

Public Sector Partnership Private Sector

Service Requirement Service Delivery

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Lessons Learnt

• Legislative framework

• Policy framework

• Institutional reform

• Capacity building:– Public sector

– Private sector

• Central support

• Communications

• Programme development

• Quality Control

• … and above all, Political CommitmentUNCLASSIFIED

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Infrastructure UK Contact:

Javier.Encinas@hmtreasury.gsi.gov.uk

44 (0) 20 7270 1347

www.hm-treasury.gov.uk

Infrastructure UK Contact:

Javier.Encinas@hmtreasury.gsi.gov.uk

44 (0) 20 7270 1347

www.hm-treasury.gov.uk

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