Private Finance Initiative - Treasury Contents

Written evidence submitted by Canmore Partnership Ltd


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.


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.


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).


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.


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.


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.


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.


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).


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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