South Africa: Public Private Partnerships
17 July 2007
Article by Clare Corke
Public Private Partnerships – Government To Relook At Standardisation
In 2000, the PPP Unit of National Treasury published the first draft of the standardised terms for public private partnership (PPP) agreements ("Standardisation"). At the time that the Standardisation was first published for comment a number of concerns were raised by various entities involved in PPPs, including law firms, banks, construction entities and service providers. Many of these issues remained unresolved by March 2001, when the practice manual in relation to PPPs together with the official Standardisation was issued by the PPP Unit.
Since then the projects that have come to the market or closed have continued in the main to be plagued by these issues. In many instances these items have caused projects to be called unbankable by lenders and unpalatable by equity holders, as the risks being placed at the doors of lenders and equity holders cannot be managed effectively by them. Often, however, the risks cannot be managed or controlled by Government either, and are often risks of very low probability, but high impact in the event that they occur. This raises the question of who should bear the risk of an uncontrollable, unforeseen event occurring? Should it be the private sector, on the basis that they are earning a return and therefore should be obliged to bear the risk irrespective of the cost? Or should it be Government, on the basis that the risk is usually of low probability (save that off-site power shortages is and will continue to be a very real risk for the foreseeable future)? These issues have not been the subject of intense debate in a number of projects and a true market position has not been determined.
Accordingly, the review and amendment of Standardisation is critical to the future of PPP. Should Government be able to meet some of the expectations of the private sector, the cost of PPPs should be reduced and the procurement process should be eased. It is therefore hoped that the process will commence during the course of 2007 and that a revised Standardisation will be available for comment later this year for publication early in 2008.
Public Private Partnerships – An Opportunity Missed?
Public private partnerships (PPPs) have been promoted by the Government since before the promulgation of the Public Finance Management Act in 1999. But despite almost 10 years of PPPs, we have still not seen the influx of projects that many people anticipated and feel are needed to help address some of the infrastructure needs and service issues of the Government.
While there are a number of projects which indicate the potential benefits of PPPs to South Africa, there do appear to be difficulties in the roll out. Questions are continually asked as to whether PPPs can be implemented successfully in South Africa.
One project that does indicate the benefits of PPPs is the Inkhosi Albert Luthuli Hospital in Kwa-Zulu Natal, in which Impilo Consortium (Pty) Ltd was appointed not only to provide facilities management services, but also information technology and "state of the art" equipment. When it was first implemented there were concerns about whether a tertiary hospital should be the focus of a PPP. This project has however indicated the ability of the private sector to facilitate the provision of services within the public sector, and is a shining example of excellence within the national healthcare system. The success is due not only to the PPP, but because the working environment permits the provision of medical services by doctors without their having to determine how to manage the operation of the hospital on a budget that is not adequate for the purposes and without having to follow repeated tender processes for the provision of services.
Unfortunately, while this project motivated the Kwa-Zulu Natal Department of Health to implement a PPP to provide certain facilities management services throughout the province, and was used as a point of reference to the Western Cape Department of Health, the model is not being used in hospitals that are desperate for facilities management, such as the Johannesburg Hospital. It is also hoped that when the Chris Hani Baragwanath Hospital Project, which is currently registered as a PPP, comes to the market the scope of the project does not cause it to be unduly delayed.
Similarly, while the two maximum security prison projects have been subject to scrutiny on the basis of perceived cost, the Department of Correctional Services only recently appointed transaction advisors to consider additional prisons being undertaken as PPPs, nearly 10 years after the original project agreements were signed.
While six projects were concluded during the course of 2006, the Government needs to dramatically increase the number of projects being implemented and concluded annually in order to address the backlog of services that can be addressed by the private sector.
Showing posts with label PPP. Show all posts
Showing posts with label PPP. Show all posts
Friday, August 24, 2007
Monday, July 2, 2007
NUS PPP to shortlist 3 bidders
Singapore university PPP project to shortlist three
IJ Online 29 June 2007
The National University of Singapore (NUS) is set to shortlist three consortia from five pre-qualified bidders to DBFOM a new S$600 million (US$395m) campus in the university town - writes Robert Lovell
Having whittled down the bids to three, the NUS will select a preferred bidder by 2008 for the PPP project - known as University Town @ Warren.
The five consortia are:
KPMG conducted a PPP feasibility study and is financial adviser, Lovells Lee & Lee is legal adviser and Mott MacDonald is technical adviser.
The project is due to reach financial close and start construction in mid 2008, it will be operational by mid 2010.
IJ Online 29 June 2007
The National University of Singapore (NUS) is set to shortlist three consortia from five pre-qualified bidders to DBFOM a new S$600 million (US$395m) campus in the university town - writes Robert Lovell
Having whittled down the bids to three, the NUS will select a preferred bidder by 2008 for the PPP project - known as University Town @ Warren.
The five consortia are:
- Campus Living Villages - Campus Living Villages, Transfield Holdings, APP International, Kohn Pederson Fox Associates PC, A+I International, Umow Lai, Tierra, Meinhardt (Singapore), WT Partnership, China Construction, Keppel FMO, Deloitte, ANZ, Freehills and Campus Living Villages
- Gammon Capital - Gammon Capital, HSBC, Allen & Overy, Turner & Townsend Cost,Knight Frank, Skidmore, Owings & Merrill, DP Architects, Sitetectonix, Beca Carter, Hollings & Ferner (SE Asia), Systra MVA Singapore, Connell Wagner, Acviron Acoustics Consultants, Environmental Resources Management, Gammon Construction (Singapore) and Woh Hup Construction JV and United PREMAS
- Living Education - Babcock & Brown, Sembawang Contractors & Engineers, Honeywell & Serco Guthrie, UniLodge, Cox Group, RSP Architects, Squire Mech, Davis Landon & Seah, Citta Group, Evans & Peck and Urbis JHD
- Plenary Learning Consortium - Plenary Group, Deutsche Bank, ISS Facility ServicesOperations, Architects 61, Woods Bagot, Arup Consultants and Engineers, WT Partnership and Allen Arthur Robinson
- Uni Living - Macquarie Bank, Shimizu Corporation, BurtHill, CPG Corporation, United Engineers, University Partnerships Programme and WT Partnership
The campus will include:
- accommodation for up to 6000 students
- new town centre
- sports and recreation facilities
- leisure and retail facilities
- integration with academic and research facilities
KPMG conducted a PPP feasibility study and is financial adviser, Lovells Lee & Lee is legal adviser and Mott MacDonald is technical adviser.
The project is due to reach financial close and start construction in mid 2008, it will be operational by mid 2010.
Friday, June 15, 2007
Soft costs benchmarking for UK PFI projects
Market Testing and Benchmarking in UK PFI
06 June 2007
(IJ Online) The construction phase of UK PFIs have been shown to outperform coventional procurement in being delivered on-time and on-budget - but questions still remain concerning the performance of PFI over the contract life cycle.
As the UK National Audit Office releases its maiden report on Benchmarking and Market Testing in the services component of PFI projects, Lovells project finance partner Mike Matheou assesses the performance of deals to date.
Introduction
The National Audit Office issued its report on benchmarking and market testing (which they refer to together as 'value testing') the on-going services components of PFI projects on 6 June 2007. Working on very little data, the NAO are able only to draw limited conclusions about value for money where value testing processes have already been operated, but make a number of clear recommendations for the future, including in relation to:
The continued need to follow the Treasury's 'Operational Taskforce Note 1' of October 2006 ('the 2006 Guidance); and
Steps to be taken centrally to facilitate value testing, such as maintenance of databases for benchmarking, and enhancing competition, for example, by publicising market testing opportunities for bidders on the Partnerships UK website.
Background
Contractual provisions which separately identify elements of the 'unitary charge' attributable to components of the overall service under a PFI contract, and then provide for that component of the price to be varied separately appear to fly in the face some fundamental PFI concepts. However, this is an area where concepts and dogma give way to pragmatism and a need to manage risks on both sides.
It is now recognised that 'bundling' of soft services (such as cleaning, catering and message delivery within a building provided and maintained under PFI) is not automatically the correct approach to take (and this is reinforced by one of the NAO's recommendations).
However, once it is decided that including soft services represents value for money, then the value of these services should be periodically tested. The 2006 Guidance states that '…Value testing is designed to ensure that prices paid for soft services reflect a competitive market rate … It also provides an opportunity … to re-scope services to meet changing need [and] … to offer new approaches and technologies …'.
In fact, these provisions manage risks for both sides:
The public sector can ensure that prices paid reflect a competitive market rate and effectively keeps the private sector 'on its toes'
The private sector knows that it is only taking a 5 - 7 year risk that underlying costs may rise in excess of the RPI-linked indexation provisions governing the unitary charge, as opposed accepting that risk for the whole PFI contract period.
Two sorts of value testing provisions are in common use:
Benchmarking, whereby the private sector (at contractor or sub-contractor level) compares costs for providing the relevant services against corresponding market prices, which may lead to a price adjustment, but not to a change of the sub-contractor providing the services; and
Market testing, which is the re-tendering of the relevant service to ascertain the market price of that service, which may lead to the replacement of the sub-contractor operating that service by the winning bidder, along with an adjustment to the unitary charge.
PFI standard forms commonly provide for benchmarking as a first stage, and only if there is no agreed result from benchmarking do the parties move to market testing. SOPC4 now reflects the Treasury view that Market testing is preferred (reversing the previous view that benchmarking was to be preferred) but, the NAO concludes that there are advantages in having both benchmarking and market testing options since an authority can then choose the best process for its particular circumstances.
The evidence reviewed by the NAO
The NAO relates first consider the proportion of PFI contracts which include value testing. The Research on 102 projects identified that just over half the sample had some value testing machinery. Of the remainder the NAO agreed that no value testing was appropriate in many cases (for example, DBFO road projects where there are no soft services as such), but it also found some examples where the contract would have been suitable for these arrangements but they were not present.
Where the value testing arrangements were included there was a distinctly mixed view of the expected effectiveness. Lawyers appointed by NAO reviewed 34 contracts and concluded that the majority of the benchmarking provisions could be expected not to be effective, and there was an unqualified expectation of effectiveness in only half of the market testing provisions. Having said this, the sample is probably unrepresentative of the population of PFI deals as a whole as more than one third of the sample comprised early contracts, let before July 1999.
It is unsurprising that the NAO was only able to review a small sample of cases where value testing processes had been operated. Whilst there are now a large number of PFI projects, the period of rapid growth in the number of PFI deals signed was the beginning of this decade (and perhaps 6-12 months before that), so allowing 1 - 3 years for typical building periods, and then 5 - 7 years of operation before the value testing provisions are triggered, means that many deals are only just getting to their first value testing. Consequently, the NAO only considered nine projects, of which two were non-standard telecoms projects, and seven were more typical building projects. Of the building projects the NAO concluded that value for money had been achieved in three out of the seven cases, but that it was 'uncertain' in relation to the remaining four.
Recommendations for the future
The report includes eight recommendations. Of these, perhaps the most interesting in addition to those already mentioned above are that:
There need to be steps to ensure strong competition to reap the benefits of market testing: of the three exercises examined by the NAO two were won by incumbents, and one by an in-house team, and the NAO recognised that this could dissuade potential bidders from competing; and
In benchmarking costs authorities should be aware of potential savings of private sector participants who may derive economies of scale from involvement in a number of PFI projects (although this seems to distort the picture by changing the emphasis from the market price for the service to looking at a particular entity's underlying costs).
06 June 2007
(IJ Online) The construction phase of UK PFIs have been shown to outperform coventional procurement in being delivered on-time and on-budget - but questions still remain concerning the performance of PFI over the contract life cycle.
As the UK National Audit Office releases its maiden report on Benchmarking and Market Testing in the services component of PFI projects, Lovells project finance partner Mike Matheou assesses the performance of deals to date.
Introduction
The National Audit Office issued its report on benchmarking and market testing (which they refer to together as 'value testing') the on-going services components of PFI projects on 6 June 2007. Working on very little data, the NAO are able only to draw limited conclusions about value for money where value testing processes have already been operated, but make a number of clear recommendations for the future, including in relation to:
The continued need to follow the Treasury's 'Operational Taskforce Note 1' of October 2006 ('the 2006 Guidance); and
Steps to be taken centrally to facilitate value testing, such as maintenance of databases for benchmarking, and enhancing competition, for example, by publicising market testing opportunities for bidders on the Partnerships UK website.
Background
Contractual provisions which separately identify elements of the 'unitary charge' attributable to components of the overall service under a PFI contract, and then provide for that component of the price to be varied separately appear to fly in the face some fundamental PFI concepts. However, this is an area where concepts and dogma give way to pragmatism and a need to manage risks on both sides.
It is now recognised that 'bundling' of soft services (such as cleaning, catering and message delivery within a building provided and maintained under PFI) is not automatically the correct approach to take (and this is reinforced by one of the NAO's recommendations).
However, once it is decided that including soft services represents value for money, then the value of these services should be periodically tested. The 2006 Guidance states that '…Value testing is designed to ensure that prices paid for soft services reflect a competitive market rate … It also provides an opportunity … to re-scope services to meet changing need [and] … to offer new approaches and technologies …'.
In fact, these provisions manage risks for both sides:
The public sector can ensure that prices paid reflect a competitive market rate and effectively keeps the private sector 'on its toes'
The private sector knows that it is only taking a 5 - 7 year risk that underlying costs may rise in excess of the RPI-linked indexation provisions governing the unitary charge, as opposed accepting that risk for the whole PFI contract period.
Two sorts of value testing provisions are in common use:
Benchmarking, whereby the private sector (at contractor or sub-contractor level) compares costs for providing the relevant services against corresponding market prices, which may lead to a price adjustment, but not to a change of the sub-contractor providing the services; and
Market testing, which is the re-tendering of the relevant service to ascertain the market price of that service, which may lead to the replacement of the sub-contractor operating that service by the winning bidder, along with an adjustment to the unitary charge.
PFI standard forms commonly provide for benchmarking as a first stage, and only if there is no agreed result from benchmarking do the parties move to market testing. SOPC4 now reflects the Treasury view that Market testing is preferred (reversing the previous view that benchmarking was to be preferred) but, the NAO concludes that there are advantages in having both benchmarking and market testing options since an authority can then choose the best process for its particular circumstances.
The evidence reviewed by the NAO
The NAO relates first consider the proportion of PFI contracts which include value testing. The Research on 102 projects identified that just over half the sample had some value testing machinery. Of the remainder the NAO agreed that no value testing was appropriate in many cases (for example, DBFO road projects where there are no soft services as such), but it also found some examples where the contract would have been suitable for these arrangements but they were not present.
Where the value testing arrangements were included there was a distinctly mixed view of the expected effectiveness. Lawyers appointed by NAO reviewed 34 contracts and concluded that the majority of the benchmarking provisions could be expected not to be effective, and there was an unqualified expectation of effectiveness in only half of the market testing provisions. Having said this, the sample is probably unrepresentative of the population of PFI deals as a whole as more than one third of the sample comprised early contracts, let before July 1999.
It is unsurprising that the NAO was only able to review a small sample of cases where value testing processes had been operated. Whilst there are now a large number of PFI projects, the period of rapid growth in the number of PFI deals signed was the beginning of this decade (and perhaps 6-12 months before that), so allowing 1 - 3 years for typical building periods, and then 5 - 7 years of operation before the value testing provisions are triggered, means that many deals are only just getting to their first value testing. Consequently, the NAO only considered nine projects, of which two were non-standard telecoms projects, and seven were more typical building projects. Of the building projects the NAO concluded that value for money had been achieved in three out of the seven cases, but that it was 'uncertain' in relation to the remaining four.
Recommendations for the future
The report includes eight recommendations. Of these, perhaps the most interesting in addition to those already mentioned above are that:
There need to be steps to ensure strong competition to reap the benefits of market testing: of the three exercises examined by the NAO two were won by incumbents, and one by an in-house team, and the NAO recognised that this could dissuade potential bidders from competing; and
In benchmarking costs authorities should be aware of potential savings of private sector participants who may derive economies of scale from involvement in a number of PFI projects (although this seems to distort the picture by changing the emphasis from the market price for the service to looking at a particular entity's underlying costs).
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