Written evidence submitted by Canmore
Partnership Ltd
INTRODUCTION
1.1 Canmore Partnership Limited ("Canmore")
is a specialist promoter of public use infrastructure projects
across the UK. A brief background summary of Canmore's activities
is attached. Our submission builds upon our earlier contributions
to the debate on the future role of the private sector in providing
public use infrastructure. More than ever, the UK needs a settled,
non-partisan view on how public services are procured and funded.
In the final section of this memorandum we include an executive
summary and we propose an evolution towards a revised form of
Strategic Infrastructure Partnership provision.
THE HISTORICAL
PERSPECTIVE
2.1 In 1995 the Conservative Chancellor of the
Exchequer said: "We are changing the role of government…to
being a provider of private investment opportunities and a purchaser
of services, not always a direct investor and service provider."
His Labour Shadow said: "We aim to be an enabler…doing
rather more steering than rowing." We argue that this fundamental
policy shift was correct and has on balance been beneficial to
the public. The challenge is to identify and correct any mistakes
made along the way, and to identify and spread best practice and
so reinvigorate the process of public infrastructure provision
by the private sector. We should not be afraid to innovate whilst
building upon progress to date.
2.2 The UK now has a mixed economy of public
use infrastructure provision. Broadly this falls into three categories:
(a) services paid for by users, either directly
through user charges or indirectly through taxation, and provided
by the public sector (eg water and sewerage in Scotland and Northern
Ireland);
(b) services generally paid for by the public
sector on behalf of users and provided by the private sector (eg
PFI/PPP accommodation and elements of health provision such as
GPs); and
(c) services provided by the private sector to
users who pay for them directly within a public sector regulatory
framework (eg electricity, gas and telecommunications).
Our main focus, and so the focus of our contribution
to the Committee's inquiry, is on providing public use infrastructure
in which the public sector continues to provide the core service
(eg NHS facilities, colleges and universities). As such our model
falls short of the full privatisation historically implicit in
category (c) and is more akin to the support role played by the
private sector in category (b).
2.3 Many of the UK's current infrastructure problems
are the direct result of insufficient investment, inadequate regulation
and poor project preparation. Debate on the role of the private
sector is often derailed by dogmatic and selective historical
references and inaccurate anecdotes. We start from the proposition
that there is nothing inherently good or bad about the provision
of public use infrastructure or wider public services by either
the private or public sectors. We suggest that the optimum delivery
model is that which works best, whether it be public, private
or a mixture of both. What works best should be judged primarily
in terms of overall Value for Money ("VfM"), but crucially
this embraces not just cost but also quality. Efficiency and excellence
should be encouraged and profits should be shared between the
private and public sector partners, which neither the PFI nor
the Scottish Non-Profit Distributing ("NPD") models
currently achieve as well as they could and should do.
ACCOUNTING FOR
PFI PROJECTS; VALUE
FOR MONEY
("VFM")
3.1 We shall probably never know the real motivations
of the Conservative Government when PFI was launched in 1994.
Was it really an accounting device intended to remove much needed
investment from the public accounts? Or was it, at least to some
significant degree, a logical successor to privatisation which
mirrored the contracting out of support functions (similar to
the out-sourcing procurement strategies employed by many companies
in support of their businesses)? What is certain is that private
provision offers much needed additional funding which is available
now without further legislation or constitutional change. It is
primarily for the Government to decide on how it accounts for
PFI projects; we merely seek an even playing field on which to
compete against traditional direct procurement.
3.2 A number of criticisms have been made about
PFI/PPP, including:
— excessive
borrowing costs;
— unnecessary
and/or excessive private profit;
— poor
design;
— low
service levels, reduced facilities and poorer quality; and
— inflexibility.
These criticisms reflect a widespread public discomfort
and lack of understanding about the private sector's role. Whether
the criticisms are valid or not, we must acknowledge that such
discomfort and misunderstanding exist. We must answer the underlying
criticisms and concerns - all of which have been, or can be, overcome.
3.3 Comparison of the relative VfM of PFI/PPP
procurement is made more difficult by the continuing lack of data
relating to direct public procurement. It is presumably true that
procurements such as Portcullis House, the Holyrood parliament
building and Edinburgh trams are exceptional, but the public sector
should establish consistent reporting on the outturn costs and
completion timing of all public procurements which would inform
a better valuation of risk transfer. Private sector providers
of public use infrastructure should also embrace openness and
transparency. We successfully argued recently against the inclusion
of PFI project companies within FoI provisions because this is
unnecessary (because their public sector partners are generally
already obliged to comply with FoI disclosure) and it is also
an unwelcome and duplicated expense for the private sector. However,
we maintain that all contracts to which the public sector is a
signatory should be routinely released with exceptions made only
in respect of exceptional security concerns or genuine commercial
confidentiality (eg protection of proprietary software and sensitive
input cost data but not of the resulting prices to the public
sector).
FUNDING
4.1 PFI has built up an appetite and ability
to provide long-term funding for public use infrastructure on
terms and over maturities which were unthinkable prior to PFI.
Undoubtedly, these funding terms reflect the fundamental covenant
of the public sector counter-parties, but that covenant usually
falls far short of an explicit "state guarantee". It
is a mistake to concentrate debate solely or even primarily upon
funding mechanisms; private provision of public use infrastructure
should embrace much wider issues. However, when risk adjustment
is included in the equation, private finance is actually much
less expensive than is often stated when compared to "Treasury"
funding. PPP funders take a real, not theoretical, risk on project
failure on top of the simple state or semi-state borrower covenant
risk. Recent projects have had historically high funding costs
although refinancing should reduce these considerably in due course.
Earlier projects will benefit in perpetuity from funding terms
which now seem unrealistically low.
4.2 The experience of the last three years has
shown that it is very difficult for a new organisation like the
Scottish Futures Trust ("SFT") to raise funds. Although
we applaud much of the work of the SFT to date, it has not yet
provided a major new funding stream for public use infrastructure
projects in sectors such as health, education and similar local
authority services.
4.3 It is also important to recognise that projects
can and do go wrong sometimes; that is what risk transfer to private
providers means. In those circumstances it is investors and lenders
who are usually required to provide expertise and additional funding
to rescue them. Critics of PPP/PFI tend to focus on projects where
investors are thought to have made excessive profit, often without
consideration of whether, despite that profit, those projects
still were judged to have been better value for money than conventional
direct procurement. This judgement is also usually made without
consideration of losses sustained on other projects. A recent
study suggested that 17% of PFI contracts are unprofitable and
38% are less profitable than expected (ie 55% of PFI projects
generate returns lower than expectations). This is a very different
picture from that normally painted by critics.
4.4 It is now widely agreed that windfall profits
resulting from refinancing are unacceptable; recent Treasury guidance
requires refinancing and provides for sharing the resulting gains.
A reasonable balance has been struck which incentivises refinancing
and shares the resulting benefits. However, we query whether calls
to share investors' gains on disposing of their equity interests
in PPP projects is reasonable or practical; these procurements
are presumably already deemed to represent better VfM than alternative
procurement models (ie Full Business Case approvals will have
had to show this to be the case) and so profits on disposals are
surely part of investors' reasonable "upside".
Not for Profit?
5.1 The Non Profit Distributing ("NPD")
model was developed by Partnerships UK under a previous Scottish
Government to avoid the accusation of permitting "excessive
profits". It has been increasingly relied upon by the current
Scottish Government. However, critics of the NPD model observe
that, compared to "traditional" PFI:
— it
leaves the public sector more at risk if projects go wrong;
— in
projects signed to date, it fails to require refinancings when
they are most likely to be appropriate (ie soon after projects
are operationally secure) and does not fairly compensate subordinated
debt providers - so it has met the reasonable aspirations of neither
public nor private sectors in this regard;
— it
discourages pricing transparency by encouraging the private sector
to extract additional profit at the sub-contract level to compensate
for capped returns;
— it
gives limited incentive to the private sector to seek truly outstanding
performance but instead encourages operators merely to manage
risk so as to achieve their capped returns; and
— as
a consequence, it does not deliver enhanced VfM (ie it appears
to cap "headline" investors' returns but does not actually
cost less).
Why then is NPD better? We suggest that it simply
meets a political imperative by fudging issues. A candid review
of the relative VfM of signed NPD projects would be helpful in
taking this debate forward based on facts and not merely assertions.
BUILDING UPON
WHAT WORKS
6.1 Whatever the faults and shortcomings, much
good has come from the delivery of public use infrastructure and
services by the private sector. Although there is undoubtedly
a high degree of public concern about the PFI/PPP model, we query
whether much of this may derive from misconceptions about what
this model has actually delivered. Impartial studies generally
report that the overwhelming majority of operational PFI projects
deliver "good" or "very good" performance.
We contend that the public are much less concerned about who provides
services than who pays for them, their quality and their cost.
Any rational and pragmatic review of public infrastructure provision
must acknowledge that reality. We need to identify what has gone
well and do more of it, identifying and spreading best practice.
Moreover, any debate must acknowledge what often goes wrong with
traditional, direct procurement (eg insufficient briefing and
preparation, poor risk management and inadequate controls) and
the resulting overruns.
6.2 Whether or not "soft" services
(eg cleaning, catering etc) should be included in projects is
even now sometimes justified, usually incorrectly, by reference
to balance sheet treatment. It is now clear, and has been for
some time, that auditors should disregard any such services which
can be separately terminated when considering balance sheet treatment.
We argue that the presumption should be that additional "soft"
services should be provided as part of a package by the private
sector facilities provider only if that is consistent with the
procuring authority's overall procurement policy (ie how these
soft services are procured in similar facilities by that authority)
and, of course, only if private provision represents VfM. Canmore
has led the way in combining private sector provided "hard"
services (ie the buildings and their maintenance) with "soft"
services provided by or for our public sector clients—our
one-stop integrated helpdesks at the New Victoria and Stobhill
Hospitals in Glasgow is a practical example of this approach.
WHOLE LIFE
COSTING
7.1 Maintenance and life cycle replacement costs
cannot be ignored when judging relative value for money. One of
the main benefits of the PPP-type provision of public use infrastructure
has been the whole-life integration of design, building, maintenance
and life cycle costs. This correctly incentivises developers to
invest in quality facilities at the outset, thus also increasing
the availability of those facilities. At the end of a typical
PPP concession the public sector will inherit assets which have
been properly maintained. Any move to disaggregate the procurement
of these elements would be a major error. Procurement of all these
elements should, in our view, be at the core of any PPP-type procurement.
IDENTIFYING AND
ADDRESSING FAILURES
8.1 Any failures must be addressed, but first
alleged failures must be identified and analysed correctly. There
is an often repeated assertion that PPP projects result in reduced
facilities, lower service levels and poorer quality; that is not
our experience in those projects where we have been involved.
Moreover, although not all PPP design has been as good as it might
have been—and measures are in hand to address this—there
is no evidence to suggest that PPP design generally compares unfavourably
with the designs used in direct, traditional procurement. Our
New Stobhill Hospital in Glasgow has won multiple design awards,
including the 2009 PPP Awards "Best Designed Project"
and the 2009 Roses Design Awards "Best Public Building"
and Grand Prix. None of our projects have resulted in facilities
smaller or less flexible than their public sector comparators
(and Stobhill and St George's Hospital in London actually have
more beds). All our projects have levels of service and quality
at least as high as the equivalent direct public provision and
the relevant project companies are each held accountable for performance
and are financially penalised for sub-standard provision.
8.2 As always the public sector needs to provide
the right brief if it is to receive the right facilities. PPP-type
procurement explicitly acknowledges the ongoing costs of initial
building decisions and so makes the initial briefing of facilities
(which is crucial if the right facilities are to be procured)
far more transparent. Critics of PPP often appear to ignore the
historic costs of incorrect direct investment decisions. If public
bodies realise that they will remain responsible for those decisions,
as is the case in PPP procurement, then that increases the incentive
for proper planning at the outset.
ECONOMIC AND
ENVIRONMENTAL SUSTAINABILITY
9.1 Projects should be both environmentally and
economically sustainable: we target and achieve BREEAM "Excellent"
projects; we are also committed to fostering economic benefits
(eg through directing a minimum spend through local SMEs, giving
100% interview guarantee to potential employees from the locality
and requiring a Living Wage for all staff).
EXECUTIVE SUMMARY
AND RECOMMENDATIONS
10.1 At the heart of successful PPP procurements
are long-term partnerships between public sector customers and
private sector providers, both of whom have real stake in the
long-term success of the relationship. The Transport Secretary
is reported recently to have said:" The most corrosive [element
of being] a public procurer is that you can't build relationships
with people. Every time you procure something you have to start
from scratch." That is often the public sector's choice,
conscious or unconscious; our suggested Strategic Infrastructure
Partnerships summarised below offer an alternative.
10.2 In summary, responding to the Committee's
specific lines of enquiry:
— strengths
and weaknesses of different procurement methods (ie when is PFI
suitable?)—there is no "one size fits all" model
for optimum procurement, rather we should procure through a range
of models;
— accounting
for PFI projects—HM Treasury appears to have reached a compromise
which ensures transparent reporting and achieves a level playing
field;
— risk
transfer to the private sector—risk transfer is real; risk
should be transferred to the party which can best manage it, subject
always to achieving VfM (eg volume/demand risk, if it is outwith
the private sector partner's control, is rarely appropriate for
transfer); and
— PFI/PPP
projects rely upon the fundamental covenant of their public sector
customers; to that extent it can be argued there is at least an
implicit state guarantee for PFI deals. However, the assertion
that the public sector must rescue failed PFI projects is generally
incorrect; most, probably all, PFI documentation provides for
termination upon private sector default.
10.3 The public sector should establish consistent
reporting of all public procurements identifying outturn
costs against budget and completion against timetable so as to
enable an informed assessment of VfM relating to risk transfer.
10.4 A new form of Strategic Infrastructure Partnerships
could be achieved through simple changes to the well-proven PFI
model, reflecting both the Scottish "hub" initiative
and private sector partnering models, addressing concerns about
excessive profits, encouraging improvement and the pursuit of
excellence whilst sharing resulting gains. We suggest:
— a 30%
public sector shareholding in special purpose project companies
to reinforce partnership and common purpose—thus the private
sector remains incentivised to achieve excellence and the public
sector shares in any resulting profits (including refinancing
subordinated debt);
— requiring
senior debt refinancing and sharing the resulting gains in line
with current Treasury guidance;
— providing
for the sharing of long-term savings on insurance, maintenance
and life cycle (all of which we have done on existing PFI
projects), thus incentivising the identification and achievement
of those savings;
— encouraging
enduring partnerships with expansion potential by making provision
at the outset for possible substantial future variations and phases
and further linked projects; and
— requiring
sustainable projects (ie mandatory environmental performance
standards and commitments to local economic benefit).
April 2011
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