PPP: A FOOT SOLDIER’S TALE

PPP: A FOOT SOLDIER’S TALE
The utopian theory and reality on the front lines The role of financial markets and engineering in PPPs and the impact of the Global Financial Crisis 23 March 2011

PPP: A Foot SOLDIER’S TALE The author has taken every precaution to ensure that details provided in this presentation are accurate and is not liable for any omissions, errors or incorrect insertions, nor for any interpretations made from this presentation. The opinions expressed are strictly those of the author. John Kjorstad, editor Infrastructure Journal Greater London House, Hampstead Road London NW1 7EJ www.ijonline.com (Image above is of a shell-shocked US soldier awaiting transportation from the front line.) Hue, Vietnam, 1968. Photo by Don McCullin. 23 March 2011

Project Finance through the crisis US$bn (By source of funding) Data from IJ’s Projects Database (chart by Muhabbat Mahmudova)

PPP through the crisis (By source of funding) Data from IJ’s Projects Database (chart by Muhabbat Mahmudova)

PPP by sector 2007 2008 US$74bn 227 deals US$68bn 182 deals 2009 2010 US$46bn 155 deals US$59bn 167 deals Data from IJ’s Projects Database (chart by Muhabbat Mahmudova)

PPP transport Data from IJ’s Projects Database (chart by Muhabbat Mahmudova)

PPP social infrastructure Data from IJ’s Projects Database (chart by Muhabbat Mahmudova)

Project Finance by sector Data from IJ’s Projects Database (chart by Muhabbat Mahmudova)

PPP a European thing Data from IJ’s Projects Database (chart by Muhabbat Mahmudova)

PPP a UK thing US$m PPP in Western Europe 2005 - 2010 Data from IJ’s Projects Database

Public Sector Utopia & Reality Textbook Case Bad Example Based on several interviews conducted with experienced PPP professionals

DRIC Michigan, USA PPP ‘PPPs are not a ‘one size fits all’ model, the ‘right’ PPP enabling legislation simply expands a state’s toolbox by providing the flexibility to determine the delivery model best suited for each unique infrastructure project.’ – Joseph Pavona, The director of the Michigan’s office for PPPs writing for IJ Online; published 10 December 2010. What is the role of the public sector in PPP?

Consortia Utopia & Reality Textbook Case Bad Example Based on several interviews conducted with experienced PPP professionals

SaR-h PFI cancelled in controversy The UK government scrapped the Search and Rescue Helicopter (SAR-H) PFI amid an ongoing police investigation into alleged "irregularities" around the winning consortium. Transport Secretary Philip Hammond said that the Soteria consortium had come forward in December to tell the government that one consortium member, CHC Helicopter, had had access to commercially sensitive information about the awarding authority's appraisal of the bids. Hammond said: "The Government has sufficient information to enable it to conclude that the irregularities that have been identified were such that it would not be appropriate to proceed with either the preferred bid or with the current procurement process.“ The Ministry of Defence Police are continuing to investigate how the information came into the bidder's hands, he added. Although Hammond said the alleged misconduct has "only recently come to light", it was reported in the Financial Times that a rival bidder wrote a letter to the government in 2008 raising concerns over breaches of confidence, after discovering that a former military officer handling the privatisation had taken a job with CHC. The other consortium members are Thales UK and Sikorsky. The Soteria consortium won the 25-year concession in February 2010 seeing off a challenge from the Lockheed Martin-led Air Knight. A group of nine banks was in place to provide the £850 million debt package. The project involved the replacement of all 30 Sea King search and rescue helicopters currently operated by the Royal Air Force and Royal Navy patrolling the UK coastline. Ernst & Young was providing financial advice to the procuring authorities with legal advice coming from Burges Salmon. The Department for Transport and Ministry of Defence, who were running the procurement jointly, will now have to find an interim solution to replace the SAR-H service provided by the Royal Navy, as their Sea King helicopter fleet is reaching the end of its useful life. Article by René Lavanchy, IJ Online, published 08 February 2011

Partnership Utopia & Reality Textbook Case Bad Example Quotation from Shapna Roy, Head of Projects at Wedlake Bell, and her article published 01 March 2011 on IJ Online

“PFI” is Dead says John Laing CEO A senior project finance investor has warned that PFI will not survive in its current form if, as expected, the Conservatives win next year's general election in the UK. Speaking at Partnerships UK's annual conference in London, John Laing chief executive Adrian Ewer said: "We can expect PFI to be dead (under a Conservative government)." Ewer stressed that the changes made by any future administration "may well be cosmetic changes," adding that private sector involvement in infrastructure projects needed to continue or the country could be facing up to "a decade of under-investment." Ewer continued: "I am saying 'forget PFI' - this is about investment in infrastructure. The words do not matter. There will still be a significant amount of private finance in infrastructure." Echoing a continued theme of the day-long conference, Ewer said that new procurement models may be required to deliver the pipeline of infrastructure projects in the UK in the wake of expected cuts in public expenditure after next spring's election. Describing potential capital spending cuts as "savage", Ewer further warned that John Laing's future may lie in other markets. "What we do is easily exportable," he told delegates. "It could mean we focus on overseas projects." Earlier in the day, Treasury economic secretary Ian Pearson MP said that the Government would "not be turning off the capex spending tap too quickly.“ Pearson also hailed the role of the Infrastructure Finance Unit (TIFU) in giving local authorities the ability to negotiate improved terms for PFI contracts and so to increase the rate at which projects have reached financial close since its inception in March this year. Article by Gavriel Hollander, IJ Online, published 16 October 2009

CSR 2010 (austerity bites) The UK Government cancelled the £13 billion Defence Training Rationalisation programme as a result of the Strategic Defence and Security Review. The move was a dramatic U-turn by the Government which just weeks ago earlier was understood to have encouraged the preferred bidder - Metrix - to begin securing the financing for the deal. Industry Reaction ‘A key issue across the public sector after 20 October will be how to prioritise schemes. Government is understood to be unenthusiastic about the use of PFI to “buy now, pay later”, and some schemes that would have been revenue funded may proceed if they can be switched to capital.’ – Richard Threlfall, The company’s head of public sector infrastructure commented ahead of the Spending Review announcements. Article by Kiel Porter, IJ Online, published 19 October 2010

CSR 2010 (austerity bites) Reaction ‘Such a drastic fall in public revenues flowing into infrastructure will inevitably force the debate on user charging, which is common in several European countries but which the UK has traditionally not adopted. There is likely to be serious consideration of user charging, not only for roads, bridges and tunnels, but also for additional energy infrastructure. Supplementary charges may become a fact of life for many, to guarantee supply and quality.’ – Richard Abadie, Taken from press statement following Spending Review announcements. Budget cuts mean UK consumers will face increases in transport and energy costs

PPP Utopia & Reality Textbook Case Bad Example Based on several interviews conducted with experienced PPP professionals

M25 Widening a political showdown MPs have criticised the UK’s M25 motorway widening project, saying it is set to cost taxpayers an extra £1 billion. According to a Public Accounts Committee report on the project, the £3.4 billion contract to widen parts of the M25 has already suffered nine years of delays and has cost the Highways Agency an additional £660 million during the credit crisis. Margaret Hodge, Labour MP and chair of the committee, said that the Highways Agency had given poor cost estimates for the scheme and did not look at possible cheaper alternatives – such as driving on the hard shoulder. The project covers 22 miles (35km) between junction 16 and junction 23 of the M25, in Buckinghamshire, Hertfordshire and Essex. It involves widening of 63 miles of the M25 and converting the remaining three-lane sections to four. The new lanes are expected to help improve traffic flows and journey time reliability, particularly during peak-time. In November 2010 a National Audit Office (NAO) examination of the M25 road widening PPP had concluded that it could have been materially better value for money. A Connect Plus consortium - including Balfour Beatty and Skanska – reached financial close on the deal in May 2009. The deal included £956 million of senior debt provided by 16 commercial banks, a separate £160 million facility from the EIB and £200 million provided by the shareholders of Connect Plus.. Article by Sakshi Sharma, IJ Online, published 09 February 2011

M25 Widening a political showdown Reaction ‘“What happened was that they took far too long to settle a contract for widening the M25 – nine years – and they hit the credit crunch and therefore higher interest rates. They failed to look properly at alternatives, the rest of Europe is using the hard shoulder, which is much quicker and cheaper to put in place rather than building extra roads. And they didn’t themselves understand the costs of both constructing and maintaining the roads. They got it completely wrong.” – Labour politician Margret Hodge (MBE) Taken from statements she made on BBC Radio 4’s Today Programme 8 February 2011. Related Article by John Kjorstad, Who Framed PFI?, IJ Online, published 11 February 2011

PPP/PFI a call for honest debate A few weeks ago at the IJ Future Finance Forum, I foolishly told delegates I would put on a flat cap and tweed jacket, and take to my soapbox in a grassroots effort to shout back at the one-sided debate on PFI in government and the mainstream press. My appearance that weekend at Speakers Corner in Hyde Park did little for the cause, though I did have a nice chat with a few dog walkers and Fintan Whelan from Mainstream Renewable Power, who as it happened was there next to me preaching the virtues of offshore wind energy. Round two of my campaign begins with an anthology of material which IJ has published in the past year on UK PPP and PFI, and a policy brief from Infrastructure Journal’s sister publication DeHavillandoutlining political comment on PFI over the last 30 days. These materials – which include some external content from respected professionals in the industry. We would like politicians and media to consider all sides in this debate, which includes unaccounted for perspectives on the whole-life costs of infrastructure and how that relates to value for money. Article by John Kjorstad, IJ Online, published 04 March 2011

UK PFI the evidence for and against Against the backdrop of recent criticism of PFI in the UK, it is more important than ever that we focus on evidence rather than perception. To do this we must focus on developing high-quality comparable data on the relative cost and performance of PFI alongside conventional procurement and other forms of PPP in the delivery of public infrastructure and services... There is a risk that, if left unchallenged, the criticism of PFI – that it is costly and does not deliver value for money – becomes the accepted wisdom and stifles or prejudices future debate on the issue of how best to deliver public infrastructure... The direction that the debate takes in the coming months on how best to meet the infrastructure challenge will have a significant impact on the way in which new infrastructure will be financed over the next few years. The availability of finance for new projects at a time of intense scrutiny of the public spending is inevitably more privately sourced. PFI has been an effective vehicle for attracting private capital into public infrastructure and its performance, as observed in social infrastructure, is by no means worse than conventional procurement when fully and transparently examined. Article by Peter Thomas of KPMG’s Global Infrastructure and Projects Group for IJ Online, published 04 March 2011

UK PFI Parliament launches inquiry Parliament's Treasury Select Committee is calling for written evidence on the future of the Private Finance Initiative (PFI). Proponents point to a record of completed projects and argue that the PFI strikes an appropriate balance between risk transfer and reward. Critics argue that many PFI projects are inflexible and expensive, or worse, that the PFI is inherently wasteful of public resources. MPs on the committee are demanding written evidence to justify the future use of PFIs on the following points: What are the strengths and weaknesses of different public procurement methods? If PFI debt had been on-balance sheet rather than off-balance sheet would PFI projects have been used as much? How should PFI deals be accounted for? How far can risk really be transferred from the public to the private sector? Are there particular kinds of risk which are particularly appropriate for transfer through PFI deals, or particular projects which are suited for PFI? What state guarantees are explicit or implicit in PFI deals? In what circumstances are PFI deals suitable for delivery of services? Article by Sakshi Sharma, IJ Online, published 09 March 2011

PPP summary for and against Reasons for: Attracts private capital when public funding is not available Spreads risk Improves performance Delivers quality and efficiency throughout the life of the asset Reasons Against: More expensive up front Long-term commitments are a drain on public finances Inflexible Lack of data supporting performance claims You decide...

Data a need for more transparency IJ collects data related to project finance transactions in infrastructure

PPP bringing back partnership Where will PPP go from here?

Reaction ‘What is clear to me is that we have seen a ‘paradigm shift’ from the pre-crisis era of eager and willing desire for general investment in social infrastructure to a post-crisis reluctant and begrudging need to invest in purely economic infrastructure. The issue is that in this traumatic transition there has been significant damage done to confidence. Indeed, the complexity of the PFI/PPP contracts is in part due to them locking down one area of uncertainty and that is the way the future may lead the contract itself to be no longer needed. In the UK this is dealt with by making the contracts beyond the interference of politicians without them being contractually liable – hence all the political clamour and media pressure for renegotiation with both the SPV and its lawyers feeling pretty content.’ – anonymous academic from a UK university Taken from private correspondence. John Kjorstad Editor Infrastructure Journal j.kjorstad@ijonline.com
PPP: A FOOT SOLDIER’S TALE
23 March 2011

PPP: A FOOT SOLDIER’S TALE