2.12 The past ten years have seen major changes in the public sector's procurement of assets and services. PFI has been at the heart of this. PFI has applied a range of construction, financing and service provision contracting techniques first developed in the utility, energy and natural resources industries. These techniques include fixed-price contracts, performance-related payments, long-term solutions and capital deployed at risk in service delivery. PFI adapted these to the public sector environment.
2.13 Over this period the private sector's appetite for increasing partnership with the public sector has grown markedly, as has its capacity and capability to deliver in the public sector context. Infrastructure has emerged as an attractive asset class and with that there has been a significant growth in the number and types of private sector participant interested in the public service delivery market. Increasingly, innovative solutions are being developed to address complex investment requirements in ways which potentially deliver enhanced value for money for the public sector.
2.14 The need to extend the choice in infrastructure procurement beyond the binary PFI - conventional decision is well recognised and has been picked up in a number of ways, for example:
∙ PFI: strengthening long-term partnerships4 discussed alternative procurement vehicles including the NHS Local Improvement Finance Trusts (LIFT) and Building Schools for the Future (BSF), and also highlighted new approaches such as strategic partnerships and the integrator approach;
∙ departments have already begun to explore alternative approaches, for example as set out in the Ministry of Defence's Defence Industrial Strategy5;
∙ The Eddington Transport Study recognised the merit in the public sector securing efficiency gains through private sector engagement in the provision of transport projects and noted that the challenge is to consider what new possibilities for partnership working are afforded by the maturing of the infrastructure market;
∙ Building Flexibility: new delivery models for public infrastructure projects6 by Deloitte set out a range of models and suggested a decision tree based on the level of certainty the public sector has about its requirements as the key determinant in choosing among the models; and
∙ the Confederation of British Industry (CBI) published a report in 20077 reflecting on the success of PFI and considering how, as society changes, PFI might evolve and new models of partnership develop.
2.15 The Government will continue to use what are generally known as traditional or conventional delivery models in infrastructure (see Box 2.1) but it will seek to use them, as appropriate, in increasingly innovative ways as its procurement skills continue to develop (see Chapter 5). It will also continue to use PFI, a delivery model that is now well understood and has a proven track record in delivering value for money across a diverse range of sectors. But, as foreshadowed in the 2007 Pre-Budget Report, the Treasury is continuing and developing its dialogue with both the public and private sector around alternative value for money ways of delivering world-class public services and the next generation of Britain's infrastructure.
| Box 2.1: Conventional procurement Public sector conventional procurement has generally been characterised by input-based specifications, public sector funding and short-term contracts. Approaches include: • a public sector managed build in which the public sector first procures the design of the building or asset. It then separately procures the contractor to build the asset. The contracting authority is likely to seek a fixed price for the work. Ultimately some cost and time overrun risks may rest with the public sector through, for example, change orders. There is generally limited contractual integration with maintenance and operational phases after the asset has been duly delivered; and • a design and build (DB) contract in which an integrated project team is responsible for both the design and construction of the asset. Risks are typically shared between the public and private sectors through appropriate contract terms; for example, the risk of late delivery might be transferred to the private sector. Conventional procurement can be priced in a number of different ways, such as cost-plus, fixed price, target-cost price and guaranteed maximum price. In practice, conventional contract structures can be nuanced to fit specific circumstances and large, complex infrastructure projects can combine different elements and approaches. Standard contract documentation has evolved over time. Two suites of contracts, providing for different pricing options and now commonly used in conventional procurement, are the Joint Contracts Tribunal (JCT) 2005 suite and the New Engineering Contract (NEC3) family of contracts. Both suites consist of standard main contract documentation, sub-contracts and guidance on the usage of these documents. More information can be found at www.neccontract.co.uk and www.jctltd.co.uk |
2.16 The remainder of this chapter sets out examples of infrastructure delivery modes that involve partnership between the public and private sectors. Box 2.2 provides an overview of the key features of PPPs. Some, but not all, of these approaches involve private finance, which is considered more fully in Chapter 3. The descriptions are not intended to be definitive and there are similarities and overlaps between the approaches. The Government does not favour any one model above others, and is not endorsing the specific application of any approach by including it here. Its overriding objective is to secure value for money.
2.17 It should also be noted that this discussion excludes:
∙ infrastructure constructed, owned and managed by regulated utilities; and
∙ the provision, whether by the public or the private sector, of soft services which involve only limited investment in fixed assets.
| Box 2.2 What is a public private partnership? PPPs are arrangements typified by joint working between the public and private sectors. In their broadest sense they can cover all types of collaboration across the private-public sector interface involving collaborative working together and risk sharing to deliver policies, services and infrastructure. In the context of this document, the term PPP means project and programme-based PPPs involving the provision of assets. Such a PPP exhibits the following key features: • a joint working arrangement between the public and private sector, which may be by contract or through a joint venture company, to deliver infrastructure assets and usually, but not always, the ongoing maintenance and operation of the infrastructure assets and the delivery of associated services; • risks are allocated between the parties on the basis of which party is best placed to manage and bear the risk. Typically design, construction and operational risks are expected to be borne by the private sector; other risks which are shared are allocated in the way that best incentivises both parties to manage the risks; • generally a PPP is a long term (25-30 years) arrangement between the parties but can be shorter term, for example where ongoing maintenance of the infrastructure assets and associated services are excluded; • where ongoing operation and maintenance of the infrastructure assets and delivery of associated services are included, the public sector may pay the private sector for all or part of the use of the infrastructure over the life of the arrangement; • payment to the private sector is structured in such a way as to ensure the private sector is incentivised to deliver the required services or obligations under the arrangement; • payments are usually made by the authority but can be made by the end user, for example for the use of a toll road; • the public sector is seeking to access private sector management and expertise to drive value for money; and • the project is often financed either in part or in whole through private finance. |
4 PFI: strengthening long-term partnerships, HM Treasury, 2006
5 Defence Industrial Strategy, Ministry of Defence, 2005
6 Building flexibility: new delivery models for public infrastructure projects, Deloitte, 2006
7 Building on success: the way forward for PFI, CBI, 2007