An Introduction to Public Private Partnerships: Why Government needs to work with the private sector Vilnius 22 nd Nov

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

2. 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

3. 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

4. Characteristics of PPP • Contractualarrangement 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 ofrisks • Over a long term

5. Characteristics of PPP • Payment mechanism designed to ensure delivery and performance • Contract can terminate for non- performance • 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

6. 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

7. 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

8. 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

9. 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

10. Cost and Time Overruns

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

12. Holyrood Horror – The Costs

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

14. Asset deterioration 40% drop in quality 40% drop in quality €1 for renovation here will cost $€ here 12.5% of life

15. Benefits of proper maintenance $ millions Years

16. 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

17. 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

18. 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

19. 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

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

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

22. 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

23. 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

24. 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

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