UK: PPP Review: May-August 2011

Last Updated: 12 October 2011
Article by Nick Maltby and Gemma Groves

Current developments in the United Kingdom

The summer has proved something of a mixed time for UK PPP. On a positive note, the first new PPP projects were announced by Education Secretary, Michael Gove, in July. However, PPPs remained very much in the line of fire with the publication of the Government's 'Making Savings' guidance in July and two highly critical reports by House of Commons committees in the late summer. Whether the 'Making Savings' guidance draws a line under Jesse Norman's PFI rebate campaign remains to be seen.

Nine projects closed with a value in the region of £790m. This comprises 2 education projects, 4 energy projects, a streetlighting project and two waste projects (although one of those (at least) did not involve any senior debt). This compares with 18 projects closing in the first four months of the year with a value of £1.9bn and 12 projects closing with a value of £725m in the same period last year (although this was of course immediately after the General Election). For the first time energy projects dominate in number if not in value. Whether this marks a long term shift remains to be seen given some of the uncertainty created by the Government's Energy Review.

Policy and legislative developments

It would be nice to be able to report almost 18 months into the Coalition Government that the policy malaise with regard to PPPs has been resolved and that the market now knows where the Government stands and what the opportunities are. The announcement in July of some new PFIs with detail to follow, and the appointment of a permanent head of IUK, however, has done little to alleviate the general malaise and it seems unlikely that the second edition of the National Infrastructure Plan will change this. However, there are signs that with less than anticipated growth figures Ministers are getting increasingly nervous, and while for the time being no new money will be found, investment in infrastructure will move up the policy agenda.

Future of PFI

Throughout the summer the House of Commons Treasury and Public Accounts Committees have been taking evidence from academics and people involved in PFI. Both reports are very negative as far as PPP is concerned. The Treasury Committee Report on the Private Finance Initiative1 concludes that PFI should only be used in limited cases as private finance has become significantly more expensive than government borrowing since the credit crunch and there is no evidence of savings or efficiencies to offset this. In particular, there is little evidence that PFI projects perform better in terms of whole life cost or delivery on time and to budget. Indeed, there was some evidence that design innovation is worse in PFI than elsewhere. The report also suggests that the playing field between PFI and non-PFI projects still needs to be levelled and that stricter guidelines governing the use of PFI are needed.

The Public Accounts Committee's report, Lessons from PFI and other projects2, is rather shorter than the Treasury Committee's report and covers less ground but is similarly critical. Its conclusions include the following: PFI has been used in circumstances where it clearly did not represent value for money; tax revenue assumed in VFM assessments is being lost through PFI sponsors using off-shore arrangements; the public sector has insufficient information on the returns made by PFI investors; transparency on full costs and benefits has been obscured by Government departments hiding behind commercial confidentiality; the public sector has failed to make best use of commercial skills; and the scope for greater efficiencies must now be addressed. Margaret Hodge, chair of the Committee of Public Accounts and a Minister in the last Government, said: 'While PFI has delivered many new public buildings and services that might not otherwise have been built, it is far from clear that it has provided value for money. At present, PFI looks like a better deal for the private sector than for the taxpayer.' The Treasury is due to respond to the findings of the earlier Select Committee report in October.

By way of response to this criticism the CBI has produced a report, 'Building strong foundations'3, which argues that infrastructure is essential to the UK's future, with the UK languishing 33rd in the international competitiveness league table, and that private finance will be essential if the UK is to meet the UK's needs. PFI had allowed a large number of projects to be launched which would not otherwise have been possible. Contrary to the Treasury Select Committee report, the CBI report maintains that PFIs do represent good value for money and that the benefits to be realised from whole life costing are real rather than illusory. The report continues that private finance models must evolve with better management of risk (specifically energy and insurance), more selective use of competitive dialogue and a sharing of best practice. Reference to international models such as the Canadian one is also suggested.

Making Savings in Operational PFI Projects

In July 2011 HM Treasury published the final version of its document, 'Making savings in operational PFI contracts'4. This follows the draft version published in January 2011 and the 'deep dive' into a number of operational PFI contracts, notably the 2004 Romford Hospital PFI contract and three defence PFI contracts (although it might be queried why no local government PFI contract was included). The report was originally due in spring 2011. In its press release accompanying the update, Treasury Minister, Lord Sassoon commented, 'PFI contracts are not immune from savings. The launch of this pilot, along with our next round of engagement with industry on a PFI code of conduct, indicates our determination to drive out costs while ensuring front line services are maintained. It is critical that Government urgently addresses every opportunity for savings across all contracts, no matter how complex they may be. We owe it to the taxpayer to eliminate wasteful practice and gold plating in contracts.'

The press release highlights savings that may be made around effective management of contracts, the efficient use of space and a review of soft services requirements leading potentially to savings across 495 operational PFIs in the order of £1.5bn (although it is unclear over how many years that will be).

The announcement is part of an ongoing programme of reform to improve the cost effectiveness and transparency of PFI contracts which began back in February 2011 and which has included the abolition of PFI credits to create a level playing field for all forms of public procurement, the introduction of new guidance to departments to strengthen the approvals process of all projects and the inclusion for the first time of PFI liabilities in the unaudited Whole of Government Accounts (see below).

The central recommendations within the updated guidance are that operational savings can be achieved principally from the more effective management of contracts (including performance regimes and cost/gain share mechanisms), the efficient use of space and a review of soft services requirements. The guidance sets out steps to be followed when conducting a contract savings review and when considering changes to a contract. For those contracts that do not have SoPC4 transparency provisions these should be adopted, as should a variations protocol, and the Government intends to agree a code of conduct reflecting this. Particular areas dealt with by the guidance are: how to approach insurance provisions while the Government considers self or pooled insurance; encouraging users to reduce energy consumption and implementing smarter energy purchasing; sub-letting, increasing occupational density (as in the Treasury Main Building) or moth balling PFI assets where necessary; reviewing the service specification to ensure it meets current needs and removing services where appropriate but having regard to any interface risk with the contractor; aligning value testing exercises for public bodies with multiple projects; and taking back the provider's share of change in law risk. Speaking of the Treasury's Select Committee report, published on 19 August, the CBI said it felt the Government had been 'right' to look at the levels of PFI used in public sector development and it must 'learn from its mistakes'.

Legislation

Health and Social Care Bill

The Health and Social Care Bill had its third reading in the Commons at the beginning of September. It will now go to the Lords. The Bill5 broadly reflects the recommendations of the NHS Future Forum set up by the Government in April to review the Bill. The Forum reported6 its findings and recommendations to the Government on 13 June 2011, which largely accepted7 the Forum's recommendations on 14 June 2011. In broad terms, accountability will be enhanced, competition down graded, integration promoted and the timetable for trusts to become FTs and for the establishment of Clinical Commissioning Groups relaxed.

Localism Bill

Over the summer, the House of Lords completed the committee stage of the Bill8 (as it stood in July). In general terms few amendments have been made to the Bill, and even those amendments were proposed by the Government. The report stage is expected to conclude on 12 October and royal assent is likely in November. For further information on the progress of the Bill see http://www.bdb-law.co.uk/blog.

The Public Procurement (Miscellaneous Amendments) Regulations 2011

On 17 August the Public Procurement (Miscellaneous Amendments) Regulations 20119 were published alongside a document summarising the responses to the consultation on how to implement the fall out from Uniplex v NHS Business Services Authority on time limits in procurement cases, where the court held that the UK rules on time limits for bringing proceedings did not accord with EU law. Of the 3 policy options considered (10/15 days from date of knowledge; a longer period than 10/15 days from date of knowledge; 10/15 days but a discretion to extend), the Government has selected the second option with a period of 30 days but with a discretion to extend where the court considers there is a good reason for doing so. The Regulations come into effect on 1 October 2011 and the 3 month period will apply until that date. The OGC has published an Information Note10 (06/11) regarding the changes. For this and other developments in procurement, see the latest issue of our Procurement E-Briefing.

Local Government Resource Review

In mid July, CLG published a consultation document, 'Local Government Resource Review: Proposals for Business Rate Retention'11. The wider context of the Consultation Document is a radical realignment of the business rate collection system in England so that authorities get to retain business rates collected by them, with a top up for those authorities who are considered to collect too little and a tariff deduction against those who otherwise would retain too much. Authorities will get to retain additional business rates generated in their areas above an agreed baseline (subject to a levy for disproportionate gains) and will therefore be encouraged to pursue policies which encourage rather than stifle growth. However, the business rate multiplier will continue to be set centrally so there will be no adverse impact on business through the change. The new system would, as at present, be adjusted to reflect the five yearly business rate revaluations and there would be an option to reset the system for an authority if it was felt that resources no longer matched service pressures. The consultation period lasts until Monday 24 October. The new system will be in place by 1 April 2013.

The Consultation Document sets out two ways that TIF could be operated within the business rates retention system. Option 1 would allow authorities to determine for themselves whether to invest in a TIF scheme but would provide no special treatment. Under Option 2 there would be a fund based system run by central government but free from the risk of loss to the levy or reset process, which could be similar to the Scottish system. CLG has published 8 Technical Documents12 none of which shed more light on how TIF might work. TIF, as things stand, will not be an economic catalyst in England any time soon.

Whole of Government Accounts

In July, the Office for Budget Responsibility published details for the first time of all of the UK's private finance initiative debts. They also show that PFI capital liabilities as of 09/10 were over £35 billion. The OBR's assessment in its Fiscal Sustainability Report13 is that these liabilities relate to about 90 per cent of all operational PFI assets, which suggest the total capital liability is closer to £40 billion. The difference arises due to the internationally recognised accountancy standards used in WGA.

New Head of Infrastructure UK

After a period lacking in direction with the departures of James Stewart and Andy Rose and the suggestion that no new permanent head would be appointed, the Government has quieted concerns around UK PPP with the appointment of Geoffrey Spence as IUK's new Chief Executive. Spence headed the Treasury's PFI Policy Unit between 2002 and 2004.

Defence

Little progress was made in the defence sector. In July, HM Treasury's report, 'Making savings in operational PFI contracts', revealed that parts of the operation of Ministry of Defence PFIs will be hived off and distributed to other parts of the defence establishment. Three of the four projects examined by the report are defence projects, namely, the MoD main building redevelopment, the Corsham Development Project and Welbeck Defence Sixth Form College.

Education

In June it was announced that Partnerships for Schools is to be closed and that its responsibilities will be moved to the new Education Funding Agency. How many of its 170 staff will transfer is not yet known. Its demise will surprise few especially after the departure earlier in the year of Tim Byles', its erstwhile chief executive.

In July, in what was the first announcement of any new PPP projects since the Coalition Government came to power, PfS published details of the DfE's Priority School Building Programme. The programme will address the condition of those schools in the worst condition and who missed out on BSF funding. It is expected that the equivalent of 100 secondary schools will be funded giving the initiative a value of £2bn - £3bn. What form the procurement will take remains to be seen although the Government has pulled back from a centrally driven model and a locally available framework is now likely. Applications to be included in the programme are due by 14 October 2011. The first schools will open in 2014 – 15 (in time for the 2015 general election). It is expected that those authorities who were successful in judicially reviewing the way the BSF programme was cancelled will be among the applicants after it was confirmed that their BSF programmes will not now be restarted.

Two BSF projects closed. In June, Halton BC reached financial close on its £56m BSF project with the Local Transformation Partnership (a consortium of Hotchief, Galliford Try and Vinci). The project will be funded by Aviva and involves the expansion and renovation of one school under PFI. The eight other school projects originally planned for Halton were cancelled by Michael Gove, the Education Secretary, as part of the review noted above. Also in June Morgan Sindall reached financial close on the £65m Phase 2 of Hull's BSF project, involving 3 new build schools.

In August it was announced that International Public Partnerships Limited has acquired the UK Government's interest in the BSF programme for £60m. BSFI was set up by the Government to take stakes of between 10% and 20% in BSF projects, and currently operates a portfolio of 48 projects. Given the criticism by MPs of the gains made by equity investors in PFI projects, it might have been expected that the Government would have retained its stake to realise potentially greater gains later.

Energy

In July, the Government published its Electricity Market Reform (EMR) White Paper,14 which confirmed plans to set up a fixed feed-in tariff rate for generators of low carbon energy. It is hoped the new regulation will help steer further private sector investment into the sector. Over £110bn in investment will be needed to build sufficient new energy generation capacity and upgrade the grid by 2020, according to DECC. Key features of the EMR include: a carbon price floor to reduce investor uncertainty; putting a 'fair price' on carbon and providing a stronger incentive to invest in low carbon generation now; the introduction of feed-in tariffs with contracts for difference to replace the current renewable obligation certificate (ROC) system; and an Emissions Performance Standard (EPS) set at 450g CO2/ kWh to reinforce the requirement that no new coal-fired power stations are built without carbon capture and storage, but also ensure that necessary investment in gas can take place. In addition, DECC has highlighted the need for future security of electricity supply. DECC is continuing to consult the industry on the type of mechanism required to achieve this, and will report back 'around the turn of the year'. The Government has said it intends to legislate for the key elements of the EMR package in the second session of this Parliament, which starts in May 2012, and for legislation to reach the statute book by the end of the next session, by spring 2013. It is expected that an effective transitional regime will be put in place. Government estimates show that if the reforms are implemented, consumers are likely to see smaller rises in their energy bills in the next two decades than if the current market is allowed to continue.

Also in July DECC published The Renewables Roadmap,15 which outlines a plan of action to accelerate renewable energy deployment to meet the target of 15% of all energy by 2020 while driving down costs.

Four projects closed. In July, Falck Renewables reached financial close on a £23.3m senior debt package provided by the Royal Bank of Scotland to fund the 20MW extension to its Kilbraur wind farm site in the Scottish Highlands. Once the extension is complete the wind farm will have a total installed capacity of 67MW. The new capacity will be commissioned by October. Also in July Transmission Capital Partners, a consortium comprising International Public Partnerships, Amber Infrastructure Group and Transmission Capital, secured a licence from Ofgem to operate the £49.5m high voltage link to the 172MW Gunfleet Sands offshore wind farm. Around £50m in senior debt has been provided by Barclays, Lloyds TSB and BNP Paribas. In August, NordLB structured and arranged £39.8m in debt financing for the construction and operation of the 24.6MW Hyndburn wind farm in Lancashire. The farm will be constructed by Energiekontor, with a scheduled commissioning date of September 2012. Finally, in early September, standby power developer Green Frog Power (GFP) reached financial close on an £80m financing package to fund the construction of a 214MW portfolio of diesel-powered Short-Term-Operating-Reserve (STOR) electricity plants in the UK. GFP was awarded 15-year STOR contracts for the 14 sites in the North East of England and South Wales in October 2010.

Health

The main development in the health sector was that after a period of uncertainty the Secretary of State finally confirmed at the end of July that he would continue to underwrite hospital PFI schemes and that, specifically, the deed of safeguard would still be provided but would involve stricter tests. The lower limit where the deed of safeguard will be made available has been raised to £70m. Previous deals worth less than £70m that were given the guarantee will not be affected by the change.

As noted above, the Romford Hospital project formed the centrepiece of the 'Making Savings' guidance. The debate around what to do with Primary Care Trust LIFT assets following their abolition continues with no resolution.

No projects reached financial close (indeed none are at preferred bidder). In May, the Royal National Orthopaedic Hospital shortlisted three bidders for phase 1 of the redevelopment of its Stanmore hospital as a PPP, being Sir Robert McAlpine, Balfour Beatty and Prospect Healthcare. In July, the £165m Papworth shortlist was reduced to two, Bouygues and Skanska. At the same time a shortlist of two consortia, the Carillion-led SPV (Carillion Private Finance/Uberior Infrastructure Investments) and Horizon (FCC Construccion FA/ Interserve Investments/John Laing Investments) was announced on the £450m New Royal Liverpool University Hospital PPP.

Social Housing

No social housing projects reached financial close. In July twelve housing PFI schemes with a total value of £1.2bn were given the go-ahead by the Government following a value for money evaluation. The schemes that have been approved are in Derby, Kirklees, Lambeth, Leeds (two schemes), Manchester, North Tyneside, Oldham, Salford, Stoke-On-Trent, Wiltshire and Woking.

Street Lighting and Highway Maintenance

One project closed. In August Balfour Beatty reached financial close on a £230m street lighting PPP contract for Northamptonshire County Council. Barclays Corporate and Nord LB are providing the senior debt. The contract is Balfour's sixth PPP street lighting concession with existing projects in Cambridgeshire, Coventry, Sunderland, South Tyneside and Derby. The £517m Hounslow Highway Maintenance and Street Lighting project reduced its shortlist to two, Balfour Beatty and Vinci Ringway, in May.

Transport

No projects reached financial close. In June a Siemens-led consortium comprising Siemens Project Ventures, Innisfree and 3i Infrastructure was selected as preferred bidder for the £1.5bn Thameslink Programme beating a Bombardier led consortium comprising Amber Infrastructure, RREEF, Serco and SMBC Leasing. The project also involves the construction and financing of two depots. Financial close of the transaction is expected to take place at the end of 2011.

The appointment of Siemens and Bombardier's subsequent announcement that it will make 1400 staff redundant in Derby has led to a fair amount of soul searching amid allegations that other EU states favour their domestic manufacturers. The Government has now embarked on a review of its approach to procurement in the context of the Crossrail rolling stock project but it remains to be seen whether this will lead to any real change of Government policy. In July, the Government produced its response to the European Commission's Green Paper on modernisation of EU public procurement policy16, which now states that the Government would always choose the most competitive, value-for-money bid regardless of nationality. In late August the Prime Minister confirmed that the process will not be reopened, notwithstanding the local implications for Derby. Appearing before MPs at the beginning of September, Transport Secretary, Philip Hammond, stated that Siemens' success was not down to its superior credit rating as widely reported but due to the overall package Siemens offered.

Following on from the Thameslink decision at the end of August, Crossrail announced a delay to its £1bn train and depot tender. The £1bn tender to supply

up to 60 new trains and depots for the £16bn Crossrail project had been expected to be launched later this year, with the decision announced in 2013. However, a delay will allow time for the Department for Transport to conduct a review of the EU procurement rules to see if UK companies are unfairly losing out to rivals for large UK infrastructure projects. As a result of the announcement, Alstom, one of the shortlisted bidders, withdrew from the tender. The remaining bidders include Bombardier, CAF, Hitachi and Siemens.

In Edinburgh the long running tram saga continues. The tram PPP is running over two years late and massively over budget. At the end of August Edinburgh councillors announced as a cost saving message that the tram would not end in the centre of Edinburgh only to overturn this decision within a week after the Scottish Government threatened to remove funding if they stuck with it.

Waste

As ever, it has been a mixed few months for the waste sector. In June, the Government published its Review of Waste Policy17. This sets out a number of commitments including: to work with business on a range of measures to prevent waste occurring wherever possible, ahead of developing a full Waste Prevention Programme by December 2013; to explore the potential for new voluntary responsibility deals to drive waste prevention and recycling, including in the hospitality sector and with the waste management industry and for direct mail, textiles, and construction waste; to encourage councils to sign new Recycling and Waste Services Commitments, setting out the principles they will follow in delivering waste services to households and businesses; and to scrap unfair bin fines and taxes while bringing in powers to deal with repeat fly-tipping offenders and genuine nuisance neighbours.

Two projects closed. At the beginning of July, the £45m Devon Waste PPP closed with Viridor. At the end of July and having been appointed in May, Veolia ES Aurora reached financial close on the £200m Hertfordshire Waste PPP. A planning application for the facility is due to be submitted in November. It is understood that the project is being funded by Veolia.

Elsewhere waste projects continue to struggle with planning issues and judicial review. In May, the Communities Secretary determined that the £120m Kidderminster EfW Project will be subject to a public inquiry in respect of its 200,000 tonne capacity EfW plant. This follows the grant of planning permission by Worcestershire County Council in March. In June, the Government turned down Veolia's application to build a EfW plant near Nottingham. Nottinghamshire should be contrasted with Ardley, Oxfordshire and Cornwall where applications were pushed through in February and May. In June, Norfolk County Council's plans to build an EfW plant were subjected to an application for judicial review of the decision to award the PFI contract. In July, Cheshire West & Chester and Cheshire East Councils learnt that they have failed with their judicial review claim against the Government's decision to withdraw £100m in PFI credits for the local authorities' waste PFI scheme.

Water

No new projects closed. In August, Cheung Kong Infrastructure Holdings Limited acquired Northumbrian Water Group for £2.4bn. A sale of Bristol Water is also expected in the next few months.

Footnotes

1 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmtreasy/1146/1146.pdf

2 http://www.publications.parliament.uk/pa/cm201012/cmselect/cmpubacc/1201/1201.pdf

3 http://www.cbi.org.uk/pdf/building-strong-foundations.pdf

4 http://www.hm-treasury.gov.uk/d/iuk_making_savings.pdf

5 http://www.publications.parliament.uk/pa/bills/lbill/2010-2012/0092/lbill_2010-20120092_en_1.htm

6 http://www.dh.gov.uk/prod_consum_dh/groups/dh_digitalassets/documents/digitalasset/dh_127540.pdf

7 http://www.dh.gov.uk/prod_consum_dh/groups/dh_digitalassets/documents/digitalasset/dh_127880.pdf

8 http://www.publications.parliament.uk/pa/bills/lbill/2010-2012/0090/2012090v1.pdf

9 http://www.legislation.gov.uk/uksi/2011/2053/made

10 http://www.cabinetoffice.gov.uk/sites/default/files/resources/PPN%206%2011%2031%20Aug.pdf

11 http://www.communities.gov.uk/documents/localgovernment/pdf/1947200.pdf

12 http://www.communities.gov.uk/publications/localgovernment/resourcereviewtechnicalpapers

13 http://budgetresponsibility.independent.gov.uk/wordpress/docs/FSR2011.pdf

14 http://www.decc.gov.uk/assets/decc/11/policy-legislation/EMR/2176-emr-white-paper.pdf

15 http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/renewable-energy/2167-ukrenewable-energy-roadmap.pdf

16 http://www.cabinetoffice.gov.uk/sites/default/files/resources/0707UKGPpbResponsefinal%20(2).pdf

17 http://www.defra.gov.uk/publications/files/pb13540-waste-policy-review110614.pdf

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If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.