Published on March 6, 2014
Maintaining VFM in the operational phase – a UK perspective Victoria Keilthy, UK National Audit Office 18 February 2014 VFM of operational PPPs OECD 7th meeting of PPP officials
Operational stage • • • • Forecasting demand Refinancing Managing maintenance & ‘soft’ services Negotiating savings • Affordability • Lessons from UK PPPs VFM of operational PPPs
Forecasting demand E.g. High Speed 1 (Channel Tunnel Rail Link) • Contract awarded to company predicting highest passenger revenues (lowest public subsidy) • Actual passenger demand significantly below forecast. • Government then guaranteed debt and guarantee was called upon Key points • For most PPPs contractor cannot control demand risk hard to genuinely transfer demand risk. • Important to allocate risks to party best able to manage them NAO report: The completion and sale of High Speed 1, March 2012 VFM of operational PPPs
Refinancing • Some investors have seen big gains from refinancing debt at lower rates once risky construction phase is over. • Initially, all gains went to investors and were not shared with public authority • Following NAO recommendations, UK Treasury introduced new rules in 2002 requiring investors to share refinancing gains 50/50 with public authority Key point • Approach to PPPs/ standard contractual terms needs to remain responsive to issues that emerge during the operational phase NAO report: Update on PFI debt refinancing and the PFI equity market, April 2006 VFM of operational PPPs
Managing maintenance & ‘soft’ services • 4 issues from operational hospital PPP contracts (76 contracts): • Ensuring expected performance is delivered (4 levers) • Relationship; performance management system; value testing; reputation • Interpreting the contract during disputes • Ensuring risk transfer • Managing changes Key points: • Need to devote sufficient skilled resources to contract management (12% of contracts - no contract manager) • Additional, expert support may be needed for complex issues. NAO report: The performance and management of hospital PFI contracts, June 2010 VFM of operational PPPs
Savings from operational PPPs • To date £1.6bn of savings identified over the remaining life of 684 operational contracts, with further >£1bn under discussion • Nature of savings: • Contract costs unchanged but other benefits e.g. costs avoided elsewhere • Cuts – reduction in service for a reduced charge • Source of savings: • More intensive use of assets (sub-letting office space) • Effective contract management (exercising rights to share of cost reductions) • Reduced frequency of soft services • But £1.6bn is < 1% of total £207bn remaining unitary charges on these PFI contracts - further savings likely to be available • Challenges: Lack of time, skills/expertise to identify & negotiate these savings; local reluctance to engage with the initiative NAO report: Savings from operational PFI contracts, November 2013 VFM of operational PPPs
Affordability • Fiscal pressure and resulting budget cuts have meant some PPPs have become “unaffordable” - most prominent in health sector e.g. Peterborough & Stamford Hospitals NHS Foundation Trust • Unrealistic projections of future hospital finances • Business case assumptions did not play out Key points • Important to consider affordability as well as VFM • PPP commitments can limit ability to reorganise services. • UK’s Health ministry now providing central financial support to offset cost of ‘unaffordable’ PPP schemes. • Now greater regulatory focus on long-term affordability and tighter criteria for approval. NAO report: Peterborough and Stamford Hospitals NHS Foundation Trust VFM of operational PPPs
Lessons from UK PPPs • Data – need good data on cost & performance of PPP and other procurement routes as well as data on investor returns • Skills – sufficient skilled resources to specify, negotiate and manage contracts and act as an intelligent customer • Independent, expert scrutiny/challenge of procurement method, scope of deal and key business case assumptions • Expert central support to collect and share benchmarking data & best practice • Knowledge management/ record keeping – sound corporate memory to ensure vfm in L-T contracts • Consider affordability alongside vfm at decision points; use sensitivity analysis NAO report: Lessons from PFI and other projects, April 2011 VFM of operational PPPs
Thank you firstname.lastname@example.org + 44 207 798 7347 www.nao.org.uk VFM of operational PPPs
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