SMART Seminar Series: The progress and performance of UK PFI

PPP in the UK – empirics in PFI
operational social infrastructure
Alex Murray, Teaching Fellow
Bartlett School of Construction and Project
Management, UCL
SMART, Wollongong, July 13th, 2015

CLICK TO EDIT RUNNING TITLE STYLE
•  Context
•  Theory
•  Empirics of operations
–  Hospitals
–  Schools
–  SPV financials
•  Conclusions
Contents

PFI as a form of PPP (Public Private Partnership)
•  ‘Integrated’ public procurement
•  DBFO with CAPEX & OPEX allocated by one
agent, the SPV (Special Purpose Vehicle)
•  Relatively small proportion of fixed capital
investment nationally (despite attention)
•  >700 signed projects as of March 2013
•  £9.6bn of annual Govt. liabs. in 2013/14
Recently reformed to create PF2
•  Increased equity (now 15% from 10%)
•  No soft FM (implications for WLC?)
•  Little used recently except few schools projects
(Source: Akinytoye et al., 2001)
Context: UK PFI – Private Finance Initiative

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1992" 1997" 2002" 2007" 2012" 2017" 2022" 2027" 2032" 2037" 2042" 2047"
UC#payments#(£bn)#
Capital#value#(£bn)#
UC#liabili4es#and#Capital#value#at#financial#close#
UK#Dept.#of#Health#PFI#contracts#(1992#F#2050)#
Total"financial"close"capital"value"(all"PFI)" Healthcare"financial"close"capital"value"
Total"UC's"liable"(all"PFI)" Healthcare"UC's"liable"
PFI in healthcare investment (DoH)
Source: PFI signed projects list, March 2013. HM Treasury. * Nominal values

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1992" 1997" 2002" 2007" 2012" 2017" 2022" 2027" 2032" 2037" 2042" 2047"
UC#payments#(£bn)#
Capital#value#(£bn)#
UC#liabili4es#and#Capital#value#at#financial#close#
UK#Dept.#of#Educa4on#PFI#contracts#(1992#E#2050)#
Total"financial"close"capital"value"(all"PFI)" EducaAon"financial"close"capital"value"
Total"UC's"liable"(all"PFI)" EducaAon"UC's"liable"
Source: PFI signed projects list, March 2013. HM Treasury. * Nominal values
PFI in education investment (DoE)

Context – need for good benchmarking
“We have yet to come across truly robust and
systematic evaluation of the use of private
finance built into PPPs at either a project or
programme level. The systems are not in place
to collect comparable data from similar
projects using different procurement routes.
Unless such systems are established, together
with robust evaluation of the overall whole-life
costs of alternative forms of procurement,
Government cannot satisfy itself that private
finance represents the best VFM option.”
Private Finance Projects – A Paper for the
Lords Economic Affairs Committee, National
Audit Office, 2009, page 8

Whole life cost (WLC) of serviced infrastructure
Point A: Conv. Procurement (DB + O) with in-house operations
Point B: Conv. procurement with outsourced operations
2 main reasons for potential reduction in WLC
1.  Competition reduces waste: ê x-inefficiency
ü  Allows move of A - B by ê slack & marginal é investment
in operations
Contractible output
‘x’ isoquant
OPQ (quantity)
CAPQ
(quantity)
Isocost
(Present Value)
moreinputofconstructionresourceperm2
more input of operation resource per m2
CAPEX constraint
B
A
Whole life cost & performance – constrained optimisation

DBFO and WLC – integrated procurement
Contractible output
‘x’ isoquant
OPQ (quantity)
CAPQ
(quantity)
Isocost
(Present Value)
moreinputofconstructionresourceperm2
more input of operation resource per m2
CAPEX constraint
BC
2. Integrating DB&O allows constrained optimisation of WLC
ü  Allows move from B - C without CAPEX constraint
Point C: Integrated design, build & operation (DBO)
Summary:
•  There are efficiencies to be had from ‘bundling’ DB&O
•  Integration, as in PFI, provides opportunity and incentive
to realise these over the contract life, minimising WLC
•  Previously externalities – separation of build & operation

Operating healthcare infrastructure (KPMG, 2010)
•  Research findings:
–  No difference in cost of cleaning & PFI
less variable (more cost certainty)
–  PFI hospitals have higher cleanliness
scores – better services?
–  PFI hospitals have better patient
environments ratings – better buildings?
–  PFI hospitals have better food ratings
–  BUT, scope of contract!
•  Some not fully integrated

Cost of cleaning - (£s m2) by procurement method
30
32
34
36
38
40
42
2004/05 2005/06 2006/07 2007/08
£
/
m
2
Non-‐PFI PFI
106 16 103 21 105 31 95 37

Cost of cleaning (£s m2) by procurement method

Cleanliness scores (%) as determined by NHS
86
88
90
92
94
2004/05 2005/06 2006/07 2007/08
Cleanliness
score
(%)
Non-‐PFI PFI
68 11 96 19 110 32 96 39
*
*

Patient environment ratings (1-5) – as measured by NPSA
2005 2006 2007 2008
* *
0
10
20
30
40
50
60
70
<=3 4 5 <=3 4 5 <=3 4 5 <=3 4 5
%ofsample
Non-PFI PFI
*
Non-PFI = 83
PFI = 15
Non-PFI = 93
PFI = 20
Non-PFI = 95
PFI = 29
Non-PFI = 85
PFI = 37

Cost per patient meal day (£s, 2010 prices)
5
6
7
8
9
2004/05 2005/06 2006/07 2007/08
£perpatientmealday
Non-PFI PFI
83 14 90 20 96 30 84 36

Food ratings (1-5) – as measured by NPSA
0
10
20
30
40
50
60
70
< =3 4 5 < =3 4 5 < =3 4 5 < =3 4 5
%
of
sample
Non-‐PFI PFI
2005 2006 2007 2008
Non-PFI = 89
PFI = 15
Non-PFI = 96
PFI = 20
Non-PFI = 95
PFI = 29
Non-PFI = 83
PFI = 36
* *

Hard FM expenditure (£s m2) – NHS reported
0
10
20
30
40
2004/05 2005/06 2006/07 2007/08
£
/
m
2
Non-‐PFI PFI
37 16 8 3 13 8 13 13

Backlog maintenance (£s m2) – NHS reported
0
1
2
3
133
134
2004/05 2005/06 2006/07 2007/08
£/m
2
Non-PFI PFI
35 16 8 3 13 8 13 13

National Audit Office study of PFI hospital contracts (2010)
•  PFI performs well but broadly
similar to Non-PFI operations
–  No difference in performance
•  Uses scope of PFI contract data
to control for non-PFI provision
•  We accessed data via FOI
–  Access contract scope data

The Infrastructure Forum report (2013)
•  Public vs private analysis
–  Similar cleaning cost & performance
–  Patient environments slightly better
in private
–  Significantly cheaper catering with
private provision
–  No worse (slightly better) quality with
private provision

Cleaning cost (£s m2) - input
Cleaning cost Public Private
£/m2 per annum 39.72 43.68
St. Dev. 15.81 16.42
Sample size 57 49
p = 0.208

Cleaning performance (%) - output
Cleanliness Public Private
NHS NSC score % 92.10 92.07
St. Dev. 5.88 6.62
Sample size 62 53
p = 0.982

Patient environment ratings (1-5) - output
Patient Env. ratings Public (% of n) Private (% of n)
5 - Excellent 21.3% 36.5%
4 - Good 54.1% 50.0%
3 - Acceptable 24.6% 13.5%
Sample size 61 52
p = 0.124

Catering cost (£s per patient meal day) - input
Catering cost Public Private
Cost per patient meal day (£) 8.81 6.55
St. Dev. 3.77 3.01
Sample size 54 49
p = 0.001

Food ratings (1-5) - output
Food ratings Public (% of n) Private (% of n)
5 - Excellent 53.6% 66.0%
4 - Good 41.1% 32.1%
3 - Acceptable 5.4% 1.9%
Sample size 56 53
p = 0.332

The impact of schools renewal (KPMG, 2010)
•  Research findings
–  PFI renewed & operated schools have
stat. sig. higher rate of educational
attainment increase post investment
–  There is no difference in the
operational cost of FM services
between both:
•  PFI & Non-PFI
•  Rebuilt & refurbished

Educational attainment in renewed schools relative to national
average
n = 151 schools

average by procurement method
Non-PFI n =
79 schools
PFI n =
72 schools

average by construction type
Refurbished n =
83 schools
Rebuilt n =
68 schools

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A"ainment)rela,ve)to))
na,onal)average)(%)points))
Elapsed)years)to)capital)investment)
3)year)EA)pre)&)post)
Outcomes – educational attainment
•  Investing in improvements in Human Capital
–  With associated longer run pay-offs: é productivity (é taxes)
n = 84

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!7$
!6$
!5$
!4$
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!1$
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!5$ !4$ !3$ !2$ !1$ 1$ 2$ 3$ 4$ 5$
A"ainment)rela,ve)to))
na,onal)average)(%)points))
Elapsed)years)to)capital)investment)
5)year)EA)pre)&)post)
•  As time passes, with data collation processes in place, the
potential for insight into causal links will improve!
Outcomes – educational attainment
n = 23

Cost and value ratios paper (BRI Journal, 2015)
•  Cost & value ratios: not 1/5/200,
rather…
•  1 Const. / 1 Ops. / 5 Staff
•  Importantly helps focus efforts
for cost saving innovation
•  Value:
“Findings suggest the present value of
future tax revenues alone do justify
investing in school rebuilding. Average
economic returns are positive but
highly variable, with high dispersion in
expected benefits.”

Attributed to 1st Viscount Leverhulme, founder of Lever Brothers (1851-1925)
•  Point being?? – focus resources on highest propensity for impact projects
Outcomes – wage uplifts & tax returns
“Half the money I spend on advertising is wasted; the
trouble is I don't know which half”.
Source: Graham Ive, Alex Murray & Richard Marsh (2015): Cost and value ratios of operating renewed
English secondary schools, Building Research & Information.

Operational services basket costs (2010 prices) for renewed
schools by procurement method

Return on Capital Employed – PBIT / Capital Employed
•  Real measure of return – volatile & needs work!
•  The market should normalise this between industries
–  risk transfer with negative values???

Annual Debt Service Cover ratio – PBIT / Interest paid
•  SPVs honouring their debt liabs. (high as 90% of K (=D+E)
•  Imperfect measure: interest paid rather than interest due
–  Need financial models behind projects (commercially confidential)

Conclusions
•  PFI works in some areas / projects but not all - mixed bag!
–  Not as expensive as some might say – what is the comparator?
•  The jury is still out – despite outright criticisms of PFI
–  Opponents rarely acknowledge right ‘benchmark’ – conventional!
–  Many philosophically opposed – unions, anti privatisation lobby!
•  My view: diff. projects should adopt diff. procurement routes
–  But hard when central governments mandated use of PFI in UK
•  Role of private capital in public projects is here to stay
–  Clients need to get smarter & think more about project outcomes
–  Private sector need behave themselves or stifle future pipeline

Questions???
Alex Murray – Teaching Fellow
+44 (0) 20 3108 3961
+44 (0) 770 860 1634
alex.m.murray@ucl.ac.uk

SMART Seminar Series: The progress and performance of UK PFI

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