Alister Coutts, Predavac, Edinburg Napier Univesity

Dr Alister W CouttsDQS, BA(Hons), MBA(Dist), MSc, PhD, FRICS, FCIOB, FCMI

currently

Lecturer in Project Finance & AppraisalEdinburgh Napier University

Senior PartnerDr Alister W Coutts & Partners LLP

Construction & Management Consultants

Public Private Partnerships

provide

Access to Private Sector Finance

A Mechanism for Project Control

A Chance to major on Life Cycle rather than Capital Costs

The Conceptual Framework (1)

Are about the delivery of Services to the public,

by a private sector organisation

with severe penalties for performance failure!

The Conceptual Framework (2)

A View from Inside the Public Sector

Public Private Partnerships in Action

Where? - The Highlands of Scotland (1)

Where? - The Highlands of Scotland (2)

The Highland Council – Key Facts

United Kingdom Land Area - 245,000 sq. km.

Scotland’s Land Area - 80,000 sq. km.

Highland Council Land Area - 26,500 sq. km.

United Kingdom Population - 60,000,000

Scotland’s Population - 5,200,000

Population of the Highlands - 210,000

Why Use PPPs? – The Reasons:

Acknowledged need to modernise their facilities;

Insufficient Central Government Finance available;

It left capital available for other infrastructure projects;

Financial support available from Central Government;

Allowed investment in major infrastructure developments;

Council had Project Management expertise ‘in-house’;

Council wished to promote Sustainability and to emphasise the importance of the Life Cycle approach.

PPP - A Tried and Tested Approach

Regarded as Bad Regarded as Good

PPP Projects in the Highlands of Scotland

Description Capital Value

Scottish Office - Skye Bridge 41 million

Scottish Office - Inverness Airport Terminal 16 million

Scottish Office - Highland Water & Sewage 80 million

NHS Highland - Easter Ross Primary Care Centre 16 million

NHS Highland - Craig Phadrig Psychiatric Unit 27 million

Highland Council - IT 22 million

Highland Council – PPP 1 Schools 28 million

Highland Council – PPP 2 Schools 150 million

Use of Private Sector Finance for Small Rural Projects

Criteria for Project Success (1)

Secure the Commitment of Sponsors / Users;

Establish the Affordability Criteria;

Establish the Value for Money Criteria;

Continually Check that Scheme is Bankability;

Check Acceptability of Key Terms / Conditions;

Check the Realism of the Risk Allocation.

Criteria for Project Success (2)

Prepare a Realistic ‘non-political’ Programme;

Appoint & Develop the Internal Project Team;

Appoint Compatible External Advisors;

Manage Stakeholder Expectations;

Manage Political comment & Press coverage;

Continually Market the Project.

The Show Stoppers

Lack of Open Political Leadership & Commitment;

Absence of Appropriate Legal Framework;

Non-dependable Project Revenue Stream;

Lack of Openness, Transparency & Integrity;

Unrealistic Budgets, Expectations & Programme;

A Lack of Interest (Consortia / Contractors / Funders);

An Inability to Secure Domestic or International Funds;

Political, Public & Press Hostility to the concept.

Establish Political Oversight

The Political Process

Education PPP Sub-C om mittee[8 m em bers ]

Education C om m ittee[40 m em bers ]

The H ighland C ouncil[80 m em bers ]

Establish Managerial Control

The M anagem ent D ecision M aking Process

Turner & Townsend Project Managem entDeloitte & Touche

Shepherd & W edderburn W S

Education PPP Project TeamDirector of P roperty & Architectural Services

Head of Support Services ; PPP Project O fficerHead of Contracts ; P rincipal Solicitor ; P rincipal Capital Accountant

PPP Project B oardChief Executive

D irector of Finance ; D irector of Corporate ServicesD irector of Education, Culture & Sport ; D irector of P roperty & Architectural Services

The Council’s PPP Strategy was:

Start small – minimise the risk to the Council;

Aim big – devise a ‘long term’ PPP programme;

Identify suitable potential PPP projects;

Identify lead politicians – with courage & convictions;

Identify, appoint and train PPP Project Team;

Appoint appropriate external advisers;

Allocate sufficient funds to undertake the initiative!

We tried to ensure success by (1):

Only selecting ‘appropriate’ Projects;

Getting Political support for Process & Projects;

Appointing only ‘Experienced’ Advisers;

Use of Effective Project Management arrangements;

Use of Realistic Procurement Programmes;

Use of ‘High Quality’ Procurement Documentation;

Targeting ‘known’ Consortia to pre-qualify;

Stressing the need to Consult with Communities.

We tried to ensure success by (2):

Ensuring the Outline Business Case (OBC) was realistic;

Placing the OJEU notice to suit market conditions;

Carefully selecting ‘appropriate’ Bidders;

Preparing a detailed Invitation to Tender (ITN) package;

Relating the Bids received to both the ITN and the OBC;

Avoiding the need for Best & Final Offers (BaFO);

Negotiating the key Project Agreement clauses with Bidders and Funders at an early stage in the programme;

Updating the Business Case on a regular basis.

Contractors / Consortia wished to know:

The Strategic Vision - the view of the Politicians!!

The Operational Context - is it important to the Council?

The Council – do they have PPP experience?

The Contractual Position – what is the period on offer?

The Design Concept – what quality / flexibility is required?

The Advisers – which firms have been appointed?

The Negotiating Team – have they experience & authority?

The Affordability Position – can the Council afford it?

The Procurement Programme – is it Practical or Political?

Council wished to ensure Economic Sustainability

Highland Council Objectives:

– Maintain fragile local economies;

– Ensure ‘local’ firms can participate in PPP initiatives;

– Avoid any internal redundancies / loss of capacity;

– Provide Training & Development opportunities.

A PPP initiative can deliver these Objectives if:

– Funders are prepared to work with local consortia;

– The project size allows local contractors be participate;

– Economic sustainability is fully recognised.

Sample Highland Council Projects

8 year IT Contract with Fujitsu (ICL);

€ 81 million for a Managed Service;

Provision & Maintenance of 3,500 PCs;

3 year rolling refresh of all IT equipment;

Provision of all software & hardware;

Responsible for all Training & Development;

Transfer of 50 staff to Fujitsu;

First IT scheme using private finance.

Operational PPP Projects (1)

25 year Contract with a Consortium consisting of the M J Gleeson Group plc & The Royal Bank of Scotland Group plc *

€ 128 million contract;

Project consists of 4 Schools in remote rural locations - details given later in the Presentation;

Model scheme completed in record time!

Schools now owned by Investment Fund *

30 year Contract for the funding, design, construction and operation of 11 Schools;

€ 225 million ‘Build Cost’;

€ 760 million contract value;

Single Bidder - but allowed to proceed by Treasury;

Financial Close achieved on 28 March 2006;

First school was handed over on 1 April 2007;

All schools are now fully Operational.

Outline Business Case completed for a 30 year contract for the funding, design, construction and operation of:

65 Fire Stations with a € 120 million ‘Build Cost’;

Project involves provision of facilities in four Municipal areas – Shetlands Isles, Orkney Isles, Western Isles and the Highlands!

Business Case was lodged with the Scottish Government for permission to proceed.

Pipeline PPP Projects (1)

Completed a Business Case for a 20 year contract for the Disposal of Household Waste;

Scheme was required to comply with legislation;

Proposed service will be very high cost due to the distances between communities;

The solution also has a high capital cost;

This is a politically sensitive project;

Do you wish an EfW Plant in your back yard?

Business Case accepted for a 15 year Contract for the funding, design, construction and operation of 5 Care Homes for the Elderly – € 51 million ‘Build Cost’;

Estimated € 145 million contract value;

6 Pre-qualified Bidders - with initiative being progressed under the Competitive Dialogue protocol;

Aim was to reach Financial Close in December 2008 with first Care Home to be available in August 2010;

Political decision taken to suspend the initiative!

Business Case completed for the funding, design, construction and operation of Office Accommodation with a € 12 million ‘Build Cost’;

Estimated € 39 million contract value;

4 Pre-qualified Bidders - with initiative being progressed under the Competitive Dialogue protocol;

Financial Close was programmed for May 2008;

Offices were to be available in August 2010;

Political decision to suspend the initiative!

Education, Culture & SportPublic Private Partnership 1

Initiative

The Council’s Principal Concern was:

Affordability

Not Value For Money

Affordability

2,500,000

3,000,000

3,500,000

4,000,000

4,500,0001 4 7 10 13 16 19 22

The Council was ‘up-front’ on Affordability:

Everyone Worked Together To Achieve Success

Education Committee

(Members)

Project Board

(Officers)

Project Director

Community Groups &

School Representatives

Project Managers

External Advisers &

Internal Specialists

Project Details (1)

2 Secondary Schools

Drumnadrochit

250 pupils + 24 Nursery

(4,280 m2)

Strontian

250 Pupils + 24 Nursery

(4,680 m2)

2 Primary Schools

Spean Bridge

(940 m2)

Tomatin

(880 m2)

Project Details (2)

Annual Unitary Charge – € 4.5 million

Capital Value of Projects – € 25 million

Assets revert to Council ownership at contract end

No surplus land to consider

Education, Culture & Sport PPP 1

Glenurquhart High School, Drumnadrochit - 250 pupils

PPP1 Primary School Interiors

Education, Culture & SportPublic Private Partnership 2 Initiative

Project Details (1)

Dingwall Academy

1,100 pupils

Millburn Academy

1,100 pupils

Portree High School

700 pupils

Kinlochleven High

110 pupils

4 Secondary Schools

Project Details (2)

Cawdor

120 pupils

Culbokie

80 pupils

Resolis

100 pupils

Inshes

250 pupils

Gaelic

150 pupils

Kinlochleven

70 pupils

6 Primary Schools

Project Details (3)

Annual Unitary Charge - € 24 million

Capital Value of Projects - € 201 million

Assets revert to Council ownership at contract end

No surplus land to consider

Dingwall Academy - 1,100 pupils

PPP2 Primary School Interiors

Work with Communities – It is their Project !!

Stakeholder Management Award

Sample Pipeline Projects

Establish a Pipeline

Fire Services PPP Initiative

Fire Station Locations

Fire Service Sites

Highland & Islands Fire Service

The Problem - Obsolete Fire Stations

The Solution - Single Bay - Achiltibue Fire Station

Waste Management PPP Initiative

Waste Facilities

Waste Management Sites

Waste Management Objectives

Prevent the generation of waste at source;

Use ‘local’ rather than ‘regional’ landfill sites;

Introduce Materials Recovery Facilities (MRF);

Provide an Energy from Waste (EfW) Plant.

Capital Investment is required

Public Private PartnershipsUse of Private Sector Finance for Large Urban

Projects

Hong Kong MTR Corporation 1990

Hong Kong MTR Corporation

Hong Kong MTR Hong Kong MTR Corporation is a public body;

Corporation operates on ‘prudent commercial principles’;

20 individual Development Sites above stations and depots;

Developments were phased over a 10 year period;

14 separate Development Agreements;

60% of railway funding came from PPP initiatives;

Hong Kong consortia & contractors with overseas funding.

Hong Kong MTR Corporation

High Land Values - All land owned by Central High Land Values - All land owned by Central GovernmentGovernment

Development Agreements with 8 Private Sector Development Agreements with 8 Private Sector ConsortiaConsortia

Short Duration Contracts - Only 3 to 5 year Short Duration Contracts - Only 3 to 5 year durationduration

Value of Contracts – Value of Contracts – approximately € 1,500 million€ 1,500 million

‘ ‘Upfront’ Funding of rail infrastructure by the Upfront’ Funding of rail infrastructure by the Consortia Consortia

Design, Construction & Marketing of buildings by Design, Construction & Marketing of buildings by ConsortiaConsortia

Ongoing management of building remained with Ongoing management of building remained with CorporationCorporation

Admiralty Development Agreement

Admiralty Centre – 2 x 28 storey towers - 95,606 m2

Hang Lung Development Agreement

Hongway Gardens - 35 storeys - 412 flats & 2,594 m2

Hang Lung Development Agreement

Vicwood Plaza - 33 storeys - 36,848 m2

Kornhill Development Agreement

Kornhill Gardens – 42 x 20 to 31 storeys – 1,060 flats

Traditional and Design & Build Projects

Operations Directorate Projects

Alterations to Cameron Hospital

Operations Directorate Projects

Sir George Sharpe Spinal Injuries Unit

Property & Architectural Services Projects

Golspie Secondary School : Technical Block

Grantown Grammar School : Leisure Centre

Ullapool Secondary School

Kirkwall Fire Station

Housing Services Projects

Hayton Road Social Housing, Aberdeen

Housing Services Projects

Rorie Hall Social Housing, Aberdeen

Issues to Consider

Individual Project Programmes will be shorter;

Community benefits are much easier to realise;

Project Risks are easier to assess and manage;

Possible pool of local consortia and funders;

Opportunities for local consultants and contractors;

Facilitates local democratic control & management.

Advantages of Small Scale PPP Projects

Difficult to manage a national project pipeline;

Assumes that clients have PPP procurement skills;

Procurement costs may rise due to resource issues;

Danger of a ‘feeding frenzy’ once projects emerge;

Requires a change in procurement culture – can ‘Value for Money’ be the defining characteristic if there is no possibility of delivering an initiative other than by using a Public Private Partnership?

Disadvantages of Small Scale PPP Projects

Conclusions

Successful PPP initiatives need

Public commitment from Senior Politicians;

Support for PPP initiatives from Senior Officers;

The creation of the appropriate Political, Legal & Financial Structures;

The creation of a Production Line of Projects;

A Project Team consisting of your best people;

To be promoted to stimulate market interest!

A Final Thought

If The Highland Council can use private sector finance to provide municipal facilities in a remote area on the edge of Europe then so can you!

You only need to try!

Dr Alister W Coutts & Partners LLPConstruction & Management Consultants

29 Lady Nairne DrivePERTH PH1 1RFScotland

Telephone: +44 (0)1738 565749 E-mail : enquiries@awcp.co.uk

www.awcp.co.uk

Please visit our web-site or contact us if you wish further information

Contact Information

Alister Coutts, Predavac, Edinburg Napier Univesity

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