6 December 2002
description
Transcript of 6 December 2002
![Page 1: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/1.jpg)
![Page 2: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/2.jpg)
Tony Williams
Building Value Ltd
the independent strategic advisor to the building materials, construction
& support services sectors
6 December 2002
![Page 3: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/3.jpg)
Infrastructure improvement in Europe:
private and/or public?
Private Finance Initiative in UK
“another fine mess you got me into”but
“the report of my death was an exaggeration”
![Page 4: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/4.jpg)
PFI
Established in 1992 (by a Conservative government)
Alternative method of procuring services for the public sector
‘Build now, pay later’; just like hire purchase and government eventually owns the asset
Revenue not capital spend; ex-PSBR
Public Private Partnerships (PPP) employ joint capital; ownership does not revert to government
![Page 5: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/5.jpg)
Another fine mess….
Current ‘witch hunt’ on PFI
Blanket media criticism
Focus on project delays; costs; value; ideology
Accounting practices have been questioned
Controversial proposed PPP of London’s Underground Railway
![Page 6: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/6.jpg)
Report of death is an exaggeration
£100 billion worth of schemes
- £22 billion completed
- £14 million where formal contracts signed
- £64 billion of schemes in the pipeline
This compares to annual UK construction output worth circa £80 billion
![Page 7: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/7.jpg)
Eurotunnel share price
![Page 8: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/8.jpg)
British Energy Share Price
![Page 9: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/9.jpg)
What are the main issues?
Timing and cost
Government is cheapest borrower
Value for money; transfer of risk – for Government
Off balance sheet funding
Re-financing and ‘windfall’ profits
‘Build now pay MORE later’
![Page 10: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/10.jpg)
Amey share price
![Page 11: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/11.jpg)
Pressure on public funding
-4 -3 -2 -1 0 1 2 3 4
Austria
Denmark
France
Greece
Italy
Netherlands
Spain
UK
Government net debt as % of GDP
Series2
Series1
![Page 12: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/12.jpg)
Positives
Need - £100 billion worth of schemes to date
National & regional government support
Abundance of capital
Returns are attractive
Participants see higher quality earnings
![Page 13: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/13.jpg)
Negatives
Protracted development and project delays
Costs and value for money / windfall profits
Bureaucracy / ideology / negative surveys
Poor privatisation record
The contractor
Accounting
![Page 14: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/14.jpg)
Solutions 1
Positives exceed negative ‘WACC’ by 22%
Half the negatives are logistical: timing; bureaucracy; accounting; negative surveys
Re-definition needed plus education, training and establishment of a new PFI executive
The accounting issues are on the mend….
----and why not blow PFI’s trumpet?
![Page 15: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/15.jpg)
Solutions 2
New practices, accounting standards & forecasting
Industry rationalisation will help
Standard contracts to streamline procurement
Commoditisation and bundling
Finance raised in form & price that reflects risk
![Page 16: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/16.jpg)
Solutions 3
Role and responsibility of government needs to be agreed
A strong owner in place from the outset
Replace contractor as front man
A full empirical audit of PFI
![Page 17: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/17.jpg)
Value for money test is flawed
Is private provision of services better than public?
Build cost of asset is the yard stick; it is called the Public Sector Comparator (PCS)
Alternative is to ‘rent’ asset over 25, 30 or 40 years
This is the basis of comparison
Government asks which is cheaper: buying an asset or buying a service?
![Page 18: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/18.jpg)
‘Apples with Oranges’
Cannot compare build cost with rent of same asset over number of years is wrong
Net Present Value (NPV) of rents is massively risky
Rents need large discount due to scale of uncertainty
If not, then NPV of rents is grossly over-estimated...
…and building the asset will look more attractive
![Page 19: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/19.jpg)
Discounting ‘rent’ vs capital cost
Government traditionally uses 6% discount rate (and Treasury proposes change to 3.5%)
PFI projects are long lived
Consequences of small differences are huge
If PFI discount rate is wrong by 1%...
…then cost of private provision maybe overestimated by 14% of a 40 year project
![Page 20: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/20.jpg)
Value for money (VTM) test fails
Contrary to popular conception, VTM universally underestimates private sector provision:
- failure risk: user pays only on receipt of service
- inherent risk of service: the asset may not be busy
- quality of private service is not recognised
- potential for productivity is ignored (as focus for government is reduced cost)
![Page 21: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/21.jpg)
What needs to change?
Different discount rates for PFI projects and PSC
Study sensitivity of existing projects…
…and look at those which failed
Reassessment of the reassessment procedures
Need a clear idea of PFI’s financial benefits
![Page 22: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/22.jpg)
PFI conclusions
A debate that can be won
Vital for infrastructure provision & public services
Vital for economic growth
Vital for sound public finances
It is competitive and….
….there is a wall of money for PFI to scale
![Page 23: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/23.jpg)
![Page 24: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/24.jpg)
“…I am not going to go to parents and children and patients…and say I’m sorry because there’s an argument about PFI
we’re going to put these projects on hold. They don’t care who builds them. So long
as they’re built. I don’t care who builds them…”
Tony Blair, British PM, Sept 2002
![Page 25: 6 December 2002](https://reader036.fdocuments.in/reader036/viewer/2022081512/56814446550346895db0e45b/html5/thumbnails/25.jpg)