This presentation by Victoria KEILTHY was made at the 7th Meeting on Public-Private Partnerships held on 17-18 February 2014. Find more information at http://www.oecd.org/gov/budgeting/ppp.htm

1. 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

2. Operational stage
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Forecasting demand
Refinancing
Managing maintenance & ‘soft’ services
Negotiating savings
• Affordability
• Lessons from UK PPPs
VFM of operational PPPs

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. Thank you
victoria.keilthy@nao.gsi.gov.uk
+ 44 207 798 7347
www.nao.org.uk
VFM of operational PPPs