The UK’s adoption of public-private partnerships in the 1990s revolutionised how infrastructure is delivered across the globe. But with dozens of contracts set to expire, the evolution of PPP is facing its greatest challenge.
A senior UK government official has warned at a Big Question Series event in London, hosted by Partnerships Bulletin, that the expiration of PFI contracts is by “far the biggest challenge” for the market with over 40 contracts already expired in the UK, and a further 130 contracts expected to expire in the next 10 years.
The roundtable, supported by Affinitext and DLA Piper, focused on how PPP projects are adapting to changes such as a change in ownership or as the project is forced to evolve over time. The Chatham House discussion was also focussed on preparations and predictions for PFI projects reaching the end of their concession periods.
A director at an investor/asset manager added; “there is a potential danger that if handback is not taken seriously” then that will become the “next bad news story”, while a director at a consultancy said he was worried about an upcoming review by the National Audit Office (NAO) regarding PFI exits.
The Managing PFI assets and services as contracts end review by the NAO is scheduled for spring 2020. This study will assess whether government is making appropriate preparations to secure value for money from PFI contracts nearing the end of their term.
A director at another investor/asset manager with over 120 projects in its global portfolio warned the UK government on giving up on the “world-leading” PPP expertise in the country and to take advantage of the expertise to structure solutions that can be brought to bear to life beyond handback.
Approximately 10% of the asset managers’ projects are considered to be problematic, “which means the vast majority are not” [...], and albeit not easy they deliver,” so why would you walk away from a good model? It was noted.
The poor conditions of hospitals and schools in the UK in the 1990s were recalled and compared to fantastic facilities now “being well maintained”, and it would be a shame if sections of the public sector become adversarial and focus on saving money at the end of concessions, instead of the condition of the asset at handback.
A procuring authority director emphasised that they want: a fair and efficient return for investors involved in delivering contracts; quality assets, data; and people; and a soft landing for the public sector in whatever we got back.
However what the official sees at the moment is the “good, the bad and the ugly” on both sides, with the earliest contracts most likely to be the “ugly”.
Evolving innovative PPP models
A director at a consultancy argued that “we need PPP models” to respond to the climate change agenda.
It goes to the heart of the idea that private finance is there because of the commercial disciplines it brings, and the net zero/climate change agenda only works at a local bottom up level, he said.
“I do worry that saying we are not doing DBFOs because those deals are difficult seems wrong in the current environment,” he added.
The procuring authority director emphasised to change a building over time with a highly geared project financed agreement wrapped around it is going to be more difficult than to make a change to an asset that has not got that structure wrapped around it.
“We are going to want to make major energy efficiency refits to those buildings. We are going to want change the heating systems, put solar panels, all these sort of things and I think it is going to be very difficult with the nature of the contracts that we have collectively put in place surrounding them because project finance works best in a tightly defined environment, that is what it was there to do.
That is not to say we won’t find a way through it,” he concludes.
It is was noted how contracts require flexibility in order to allow for innovation. Innovation is widely considered as an attribute of PPPs, however it was suggested that further innovation is required in the construction industry as a whole, while advances in technology will disrupt the market and needs to be facilitated.
Role of contractors and FM
An investor/asset manager who was previously with a contractor suggested “a one stop shop” is not best practice and construction firms need to get out of partnerships as soon as is possible, for a number of reasons. Conflict of interest was noted as one reason when “it all goes wrong” such as in the case of Carillion. The biggest problems in the investors global portfolio, are typically are where contractors involved, the investor illustrated.
When you have a long term view and you are genuinely looking at the whole life of the asset then it does open up a whole different approach to how you go about pleasing your clients, the investor concluded.
Another investor/asset manager agreed with this view and explained post-Carillion they sought contractors and FM providers without PPP portfolios with a different view point, and it has worked well. It was noted that Carilion were not interested in the day to day operations as they were suffering at a construction level and FM level, so as an investor they were happy just to see substandard service.
The other investor/asset manager agreed and pointed to other contractors selling their equity to make up for loses in construction. For many PFIs the contractor had to deliver on a fixed price and very often lost money. They then made money on the equity. But the equity is only 15%/10% compared to 100% of the capex that they have lost, it was explained. This never comes out in discussions on value for money of PFIs, “It was just not profitable”, the investor concluded.
Will every contract be different?
Australia was highlighted as a benchmark by several participants at the roundtable for providing more support and “wanting to make the project work”, however the industry can be somewhat optimistic as the UK public sector participants demonstrated that while they are not completely organised, a lot of work is being done “to understand what we have” and the nature of handback clauses, “so we will know what to do.”
“We will resource up to deal with it”.
The UK government official concluded organisations with dozens of contracts, such as central departments and arm’s length bodies, should be able to gear up and build up their expertise and capabilities to be an effective and professional counterparty.
But across the NHS and local government where there are hundreds of individual projects and there will be a lot of differences, the official concluded.
To view the full survey results along with a report on the Big Question debate held after the survey, please click here.