Finance Committee

Inquiry into Public Private PartnershipsConcluding Statement and Recommendations

Committee Report (3) 01-09February 2009

CynulliadCenedlaethol

Cymru

NationalAssembly for Wales

An electronic copy of this report can be found on the National Assembly’s website:www.assemblywales.org

Hard copies or copies of alternative formats of the report can be obtained from:Finance CommitteeCommittee ServiceNational Assembly for WalesCardiff BayCF99 1NA

Tel: 029 2089 8617Fax: 029 2089 8021

Email: finance.comm@wales.gsi.gov.uk

National Assembly for Wales

Finance Committee

Inquiry into Public Private Partnerships

Concluding Statement and Recommendations

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Angela BurnsChair

Carmarthen West andSouth Pembrokeshire

Mohammad AsgharSouth Wales East

Alun DaviesMid and

West Wales

Christopher FranksSouth Wales Central

Ann JonesVale of Clwyd

Huw LewisMerthyr Tydfiland Rhymney

Nick Ramsay replaced Nick Bourne on the Committee on 11 November 2008Christopher Franks replaced Alun Ffred Jones on the Committee on 23 September 2008

Kirsty Williams replaced Jenny Randerson on the Committee on 13 January 2009

Nick RamsayMonmouth

Joyce WatsonMid and

West Wales

Kirsty WilliamsBrecon andRadnorshire

Finance Committee

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Chair’s Foreword As we face the realities of a global recession the need to maximise the effectiveness of the Welsh budget is felt more strongly than ever. Calls on the limited funds available to the public sector are likely to increase as the needs of the Welsh people change and intensify in a harsh economic climate. However, the many calls for investment in public sector infrastructure should not go unheard at this time. The need for schools, hospitals and other assets to be renewed remains unchanged and investment in such capital projects could provide a vital lifeline to businesses in Wales during the next few years. Many countries have successfully managed to build partnerships that have drawn on the skills, expertise and investment of the private sector to enhance provision of public services. These partnerships, which reflect the many different facets of Public Private Partnerships, have offered a mutually beneficial outcome to both the public and private sector. The partners’ shared goal of improvement to our public infrastructure has resulted in both increased investment in public assets and a reasonable reward for private investors. Capped returns and not-for-profit distribution models have addressed the headline-grabbing profits of initial untested PFI contracts that caused concern in the past. Other models have been born out of experience and a creative approach. This is the second and final report of the Inquiry and should be read in conjunction with the first report, published in September 2008. In this report, the Committee highlights some of the Public Private Partnership models it has explored both in the UK and abroad and identifies the models that might be most appropriate for use in the future. Public Private Partnerships are not a solution in and of themselves but a financial tool and just one of the many tools available to the Welsh Assembly Government as they face the challenge of providing the public infrastructure necessary for 21st Century Wales. We trust that our report will aid the Government in meeting that challenge. The Committee would like to extend its thanks to the many people who have contributed to this Inquiry through discussions, guidance and the provision of written evidence.

Angela Burns, Chair, Finance Committee

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Contents

A. Background Page 9

B. The Committee’s approach Page 9

C. Alternatives within PPP Page 10

D. Further considerations Page 13

E. Conclusions and recommendations Page 14

Annexes

Visit notes

A1 Glas Cymru Page 16

A2 Kommuninvest Page 19

A3 Örebro Page 24

A4 Shaw Healthcare Page 26

A5 Partnerships UK Page 30

B1 Terms of Reference Page 35

B2 Summary of Conclusions and Recommendations made in ‘Inquiry into Public Private Partnerships’ September 2008

Page 36

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A. Background 1. In September 2008, the Finance Committee published the first report of its

Inquiry into Public Private Partnerships (PPP). The report detailed the Committee’s conclusions and outlined its intention, in the next and final stage of the inquiry, to identify and recommend successful models of partnership to the Welsh Assembly Government for further investigation. The summary of conclusions and recommendations made in that first report are at Annex B2.

2. The Committee recognised in its first report that private sector involvement in the provision of public services and infrastructure is nothing new. The public sector has historically, and without great controversy, procured services from the private sector to build hospitals, schools, toll roads and bridges, amongst others.

3. However, with the development of the Private Finance Initiative (PFI) in the early 1990’s, the approach changed. PFI provided the private sector with the opportunity to finance and construct public infrastructure and operate essential public services for profit. Although the public sector retained overall responsibility for providing services, some of the ‘risks’ involved in that provision were contracted out to the private sector partner. In return, the public sector paid a service (unitary) charge over the operational lifetime of the facility.

4. Those in favour of the partnership approach argue that PFI increases the pool of available resources and enables investment that could not otherwise be made. They argue that the private sector’s skills and expertise, the transfer of risks and market pressures felt most keenly by the private sector ensure that the project is carried out effectively and efficiently. They further argue that the performance based rewards and penalties contained within a typical PFI contract ensure that project delivery is strengthened.

5. Those against PFI argue that the risk transfer is little more than a myth as the public sector would be obliged to provide any services that the private sector failed to deliver. Opponents also argue that the cost of procuring services in this way must necessarily be higher in order to pay for the ‘profit’ element of the private partner’s final bill.

6. During the first stage of the Inquiry, the Committee explored both points of view and considered whether the issues that caused concern in early PFI projects had been addressed and resolved in subsequent projects.

7. The Committee felt that although justifiable concerns surrounding PFI remain, new approaches to partnership had made real progress in resolving such issues. The Committee felt that partnership arrangements should not be dismissed altogether; rather there should be further investigation into ways of providing real risk transfer, value for money for the public sector and reasonable profits for the private sector.

B. The Committee’s Approach 8. The terms of reference for the Inquiry are at Annex B1. 9. Much valuable evidence was gained during the first stage of the Inquiry through

responses to the Committee’s call for evidence and the written and oral evidence explored during Committee proceedings. Views were received from both the public and private sectors through developers, financiers, unions and managers of services in the public sector. The Committee was offered advice

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and guidance from its expert advisors and from the Members’ Research Service.

10. This body of evidence was built on during the second stage of the inquiry through Committee Rapporteur Groups who visited PPP operators and spoke to experts in both the UK and abroad. The Committee focused on exploring more innovative approaches to partnership which might provide a solution to the concerns surrounding earlier PFI projects. Consideration of the merits of these models was informed by the evidence received during the first stage of the Inquiry. Reports of the Rapporteur visits can be found at Annex A.

C. Alternatives within PPP 11. A key element of a PPP project, in any form including PFI, is the need to specify

carefully at the start the outputs that are required from the project. As with any partnership, it is essential that all parties are able to share the end vision if the project is to run smoothly and efficiently towards its goal.

12. It is also vital that, when designing the vision, the end users of any new construction are consulted. It makes sense, for example, to recognise that the best person to understand what makes a good teaching environment is the teaching professional. By consulting the end user, the design can be strengthened at the start and the need for costly changes to a contract may be avoided.

13. All models of PPP involve an often complex procurement process. The Committee has recognised in its earlier report that the skill set required for such specialised negotiations can often be lacking in the public service sector. For any PPP project to be successful it is vital that public sector staff have access to help and guidance from staff with the experience and skills sets required of the project. The Committee therefore reiterates its recommendation that the Welsh Assembly Government forms a central body or unit to promote and support partnership projects within the public sector.

Non-Profit Distributing Organisation (NPDO) model of PPP

14. The concept of the NPDO model is based on the ‘classic’ PFI structure, it involves a private enterprise run on a commercial basis, where surpluses are reinvested in the community/services or used to reduce end-user charges, rather than be redistributed to shareholders. Capital for NPDOs is entirely via debt or debt-type instruments. There is no equity involved and thus no-one is legally entitled to any returns. This allows in a ‘capped’ rate of return for investors and ensures that any surpluses/dividends are used for the benefit of the community or reinvested (depending on what is specified in the contract).

15. The project company, or Special Purpose Vehicle (SPV), comprises the private sector in a partnership with the public sector authority with the latter generally playing a minority role in the SPV to look after the public interest. Risk allocation and evaluation occurs as in a ‘classic’ PFI contract.

16. The financing of the SPV is through the private sector with typically 90% ‘senior’ debt provided by financial institutions, and 10% ‘junior’ debt from other investors such as local authorities or the company controlling or managing the project. Any surplus cash flow is contracted to be reinvested for the public benefit. However, both senior and junior debt can be refinanced.

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17. Glas Cymru and Housing Associations are good examples of non-profit distribution PPP’s. Both Glas Cymru and Housing Associations have guaranteed revenue streams from either rent and housing benefit or water and sewerage charges. This provides them with a strong credit rating which enables debt financing.

18. Both examples also have a regulated structure and a clear system of governance that allows them to work at arms length to the government or local authority but with a clear aim of ensuring the needs of the community are met.

19. In the case of Glas Cymru, an SPV (Special Purpose Vehicle) company was formed with Members fulfilling the role of shareholders but with no financial interest in the company. In creating an arm’s length company, Glas Cymru created an environment that was better placed to attract staff with a mixture of private sector and public sector skills sets. The mixed skills set allowed the company to be run with the sharper edge of the private sector whilst still fully understanding the needs of the public sector. Investment from private partners was sought through the issue of 50 year bonds which offered a modest return through the payment of interest. Glas Cymru’s approach has created step changes in the way waste water is treated in Wales. Without the large up-front investment made possible by the private partners investment, such a dramatic change would have been unlikely if not impossible.

20. The Committee also considered examples outside the UK and, in particular, visited NPDO models in Sweden. Most typically created to provide housing or the local community, Swedish local authorities create SPV’s to enable housing to be best provided through prudential borrowing, re-investment of profits and the development of housing management skills at arms length to the local government. Such companies act in much the same way as UK Housing Associations. Örebro city council in Sweden has also used the NPDO model to successfully create leisure facilities and provide broadband infrastructure for local residents, education facilities and businesses. In some cases, SPV’s were sold to the private sector after a period of time.

21. The NPDO model has been used widely in the utilities and in the Scottish schools programme, eg. Argyll and Bute Council and Falkirk Council.

22. It should be noted that the NPDO model is not the only way to limit private sector profits. There are simpler changes that can be made to the classic PFI contract which can have the same effect; for example Northern Ireland Water Limited have a payment mechanism in which it is stated that above a certain level of equity return, the public sector receives a rebate on the charges it has to make.

Capital only PPP projects 23. The Committee remains unconvinced that large scale transfers of staff from the

public to private sectors are either necessary or desirable. Although TUPE and TUPE+ go some way to protect the terms and conditions of staff the development of concordats between the public sector and unions in Northern Ireland and Scotland highlights the fact that there are still concerns. There should be no call to transfer staff from the public sector to the private sector in order to improve services and in such circumstances a capital only PPP project may be considered. PPP is a financial tool which should be used to deliver outputs such as a suitable learning environment or hospital rather than a way of

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outsourcing responsibility for improved educational attainment or health to the private sector.

24. Road building is an example of where capital only PPP projects could be considered. It could also be considered for the construction and maintenance of high end investment projects such as schools and hospitals.

Managed leasing arrangements 25. The Committee was interested during stage one of its Inquiry to learn about the

managed equipment service agreement that Belfast Health and Social Care Trust had in partnership with Philips Healthcare. Under the agreement, Philips provides scanning equipment to Royal Belfast Hospital and will maintain it to an agreed standard. The equipment will be upgraded at pre-agreed times throughout the 15 year partnership agreement to provide the hospital with updated scanners of equivalent specification. Unlike a standard hire agreement, the contract allows Belfast Health and Social Care Trust to require Philips to provide equipment from other manufacturers should their own standards of development fail to meet the hospital’s requirements.

26. During part two of the Inquiry, the Committee learned about Shaw Healthcare’s scheme. In this partnership arrangement, Shaw worked with Local Health Boards to identify ways of providing healthcare to local communities where existing facilities had come to the end of their useful life or new need had been identified. Shaw, through the creation of an SPV, finances, constructs and operates a Healthcare facility in an agreed location. The Local Health Board is contracted to lease bed spaces for a set period, typically 20 years. Other facilities on the site would be marketed by Shaw on a commercial basis to increase the revenue streams supporting the project.

27. Although there are no staffing implications for the Belfast / Philips model, the Shaw model does involve the transfer of public sector staff to the private sector. By introducing multiple revenue streams through provision at each site of care homes, healthcare facilities, pharmaceutical and GP services, amongst others, Shaw endeavours to strengthen the project and create a viable business concern. Services, beds and offices are leased to local governments, local health boards, childcare service providers, individuals and others on a marketed basis in order to fully utilise the site and to reduce financial risk to Shaw.

28. The diversification of healthcare facilities on site would necessarily impact on the work staff are asked to undertake and could result in some staff struggling to make the transition between public and private sector employment. The Committee reiterates its view that staff transferring to the private sector as a result of public private partnership arrangements should not lose out and that every assistance should be given to those staff affected by such a move.

29. Managed lease agreements are typically of lower value than full PFI projects, but are still long term agreements and should not be considered any less carefully at the contract negotiation stage. Cost comparisons should include not just the provision of services for the contracted period of time but the capital cost of any infrastructure that may be expected to revert to public ownership under traditional PFI and would not under a managed lease agreement.

Local Government Partnerships 30. Local authorities in the UK have the power to borrow in order to finance capital

expenditure under the prudential borrowing regime. The main aim of prudential

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borrowing is to provide local authorities with the flexibility and freedom to plan the management of all their resources over the medium and long term. However, such a framework does not exist for other parts of the public sector in Wales.

31. It is the view of Kommuninvest, the Swedish Local Government Funding Agency, that local government buying power is greatly increased when they work in co-operation. As the local government funding agency, Kommuninvest secures funds from international investors through the issue of bonds. The funds are then offered to local governments in the form of low cost loans. Loans are ultimately secured by the tax levying power of local authorities although in reality such powers have not been called on. As Central Government is ultimately responsible for the Local Governments it too is implicated in any debt secured locally. However, there is no formal agreement between central and local government to underwrite such loans.

32. Loans are further guaranteed by the collective members of the co-operative. Each commits to underwrite the loans of the other and in doing so offers an extra layer of protection that has helped to secure a 0% risk rate for loans offered through Kommuninvest.

33. Kommuninvest has attracted international investors and claims that since the company was founded, competition to provide local authority loans has increased between banks in Sweden. The price of finance has been driven down and local authorities have more choice when considering which funding option will be most appropriate for each project.

34. Accounting rules have, so far, differed in Sweden where no national standard has been adopted. Loans from Kommuninvest have been treated as ‘off balance sheet’ with only the interest payments accounted for during the lifetime of the loan. The introduction of International Financial Reporting Standards (IFRS) will apply to Sweden, and it is unclear how this will affect the take up of Kommuninvest’s services.

35. Kommuninvest provides choice to local governments who are considering the best way to finance infrastructure and service delivery. As a purely financial tool it causes no staffing concerns or risk transfer issues like those highlighted in PFI projects. There is a hitherto unrealised risk for local governments acting as guarantor to the loans of the collective members of Kommuninvest. However, the prudential financial approach taken by Kommuninvest and its insistence that members maintain balanced budgets, along with its avoidance of sub-prime investments have so far shielded members from this risk.

D. Further considerations Borrowing Powers

36. Under Section 121 of the Government of Wales Act 2006, the Welsh Ministers can only borrow from the UK Government, and may only do so to meet a temporary shortfall in, or to provide a working balance in the Welsh Consolidated Fund. Section 7 (Expenditure financed by borrowing) of HM Treasury’s statement of funding policy for the devolved administrations1 states that borrowing by the devolved administrations must be offset by other

1 HM Treasury Funding the Scottish Parliament, National Assembly for Wales and Northern Ireland Assembly: Statement of Funding Policy. (October 2007).

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reductions in spending. Thus, any increase in borrowing would result in a reduction in grant from the UK Government in order to restore the UK borrowing position. Therefore, if Welsh Ministers were permitted to borrow, the effects of such borrowing would likely be offset by a reduction in the grant received from HM Treasury

37. Local authorities have the power to borrow in order to finance capital expenditure under the prudential borrowing regime. The main aim of prudential borrowing is to provide local authorities with the flexibility and freedom to plan the management of all their resources over the medium and long term. However, such a framework does not exist for other parts of the public sector in Wales.

Accounting treatment 38. The UK Government has announced that from 2009-10 onwards that

Government would prepare its accounts using the International Financial Reporting Standards (IFRS). At the present time, it remains unclear how the implementation of IFRS will impact on the options available for capital investment by public bodies.

39. Currently, the unitary charge associated with a PPP/PFI project is accounted for as current spending, and the future liability for the debt is not recognised on the balance sheet; ie ’off-balance sheet’ treatment. Under IFRS there is no single provision to cover accounting for PPP/PFI projects. However, there is an assumption that the asset will be recognised on the public sector’s balance sheet.

E. Conclusions and Recommendations 40. The conclusions and recommendations contained within this report are

intended to be read alongside the first report of the Committee’s Inquiry. The recommendations made in that report (see Annex B2) are commended to the Welsh Assembly Government again at this time.

41. The Committee recommends that the Welsh Assembly Government explores the possibility that borrowing powers available to local authorities could be extended to other public bodies. The Committee also recommends (pending the report of the Holtham Commission) that the Welsh Assembly Government explores with the UK Government the possibility of extending the power to borrow for capital investment to the Welsh Ministers themselves.

42. The Committee recommends that the Welsh Assembly Government should seek clarification from the UK Government with regard to how the implementation of IFRS will impact on the accounting treatment of PPP/PFI projects, and also how IFRS may affect the options available for capital investment in public infrastructure overall.

43. It is important to remember that PPP is a financial tool which is used to deliver outputs, such as a suitable learning environment or hospital, rather than a way of outsourcing responsibility for improved educational attainment or health to the private sector. Clarity of each partner’s expectations for the project is paramount and all parties should understand that PPP can deliver

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infrastructure. But it is not a way of privatising services which are the responsibility of the public sector to deliver.

44. The PFI approach has developed over time and there are now a number of models of public private partnership which enable the public sector to access increased funding for the delivery of public services in a balanced way and at a reasonable cost whilst still allowing the private sector to make a reasonable profit. The Committee recommends that the Welsh Assembly Government commits to further exploration of the models highlighted in this report in order to develop its own partnerships where appropriate.

45. The evidence and views received by the Committee have demonstrated that there is no one model that will suit all circumstances. Each case should be taken on its merits with various PPP models being considered alongside all other procurement methods.

46. The Committee does not consider PPP to be suitable at this point in time for managed services that involve large transfers of staff from the public to the private sector. This position should be carefully and periodically considered by the Government but the Committee recommends that the Government do not enter into any agreements involving the transfer of staff under either TUPE or TUPE+ at this time without careful consideration of the alternatives. Furthermore, the Committee reiterates its earlier recommendation that the Welsh Assembly Government should, as a matter of priority, work with the Trades Unions and Employer Organisations to develop a concordat similar to those used in Scotland and Northern Ireland for the use of Wales. The concordat should be used alongside TUPE+ where the transfer of staff is unavoidable.

47. The Committee reiterates its earlier recommendation that the Welsh Assembly Government establishes a central PPP unit to manage projects on its behalf and to offer advice and training to other statutory bodies considering the PPP as a financial tool. The unit should be staffed by professionals from both the public and private sector with the appropriate skills and experience to provide sound and clear advice.

48. The Committee recommends that the central PPP unit should be established utilising the skills and experience of both public and private sector personnel.

49. The Committee strongly recommends that whether the Welsh Assembly Government chooses PPP or more traditional procurement methods for future projects, maintenance costs for the lifetime of the project should be considered and accounted for at the budget consideration stage. Project savings which equate to a reduction in planned maintenance should be considered bad management and avoided if public money is to be invested in an astute way.

50. Finally, the Committee recommends that the Welsh Assembly Government should consider all future investment in infrastructure as part of a national strategic programme of public service delivery. Provision of infrastructure, whether through PPP or any other financial tool, requires an enormous commitment of resources to deliver properly. A national strategic plan would help ensure that the limited funds made available to the Welsh Assembly Government are invested in the most appropriate way and, once made, are protected for future generations.

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Annex A1 – Rapporteur visit to Glas Cymru

Finance Committee Rapporteur Group visit to Glas Cymru Date: 12 November 2008 Time: 12.00 – 13.30pm Location: Cardiff Waste Water Treatment Works

Assembly Members in attendance Angela Burns (Chair) Alun Davies Jenny Randerson Officials in attendance John Grimes, Clerk Abigail Phillips, Deputy Clerk

Others in attendance Chris Jones, Finance Director, Glas Cymru Neil Webb, Treasurer, Glas Cymru

Inquiry into Public Private Partnerships: Glas Cymru

1. Glas Cymru is a private company limited by guarantee. It was formed in 2001 and owns Welsh Water, an essential public service that supplies drinking water and sewerage services to 3 million private and business customers in Wales.

2. Glas Cymru differs to other Water Boards in that it has no shareholders or shareholder structure. Instead, the company has Members that carry out the role of shareholders, but are appointed on a pro-bono basis. Members have no financial interest in the company and all profits are returned to fund further investment and to provide a customer dividend. The first such dividend of £12 million was paid to customers in 2003. In April 2008, a £27 million customer dividend was paid.

3. Members are appointed based on their interest and background. They do not sit on the board to represent other organisations or groups, only the interests of the company.

4. Glas Cymru, a single purpose company, follows the same corporate model as many Housing Associations. Glas Cymru felt that the Directors’ background in the private sector lent credibility to the company.

5. Glas Cymru’s purchase of Welsh Water in 2001 was financed by private capital markets. Although there was political support for the formation of Glas Cymru, there was and is no financial support from the Government for the initiative.

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6. The Water Services Regulation Authority (Ofwat) stands as an intermediary between the Government and Glas Cymru, setting the maximum charge that can be levied on customers. This arrangement offers protection to the customers and keeps the Government at arms length to the company.

7. The private sector investors are paid interest on their investment. This creates a very attractive package for investors – an essential public service with a guaranteed revenue stream from 3 million customers and the flexibility to run the company with the sharper edge approach of the private sector.

8. Welsh Water’s status as a regulated public service is important to its viability as a business. It means that if the management of the company prove to be ineffectual, a new management team can be brought in without affecting the viability of the business. The regulations and restrictions that apply to a regulated public service mean that the business must be run within protected, and therefore safe, parameters which in effect protect the investors as well as the customers.

9. Glas Cymru felt that the same effect could be gained from housing, care homes and transport infrastructure projects that have a tangible revenue stream. However, a new process with no track record or a project with no tangible income stream may not fit this business model.

10. As no profits are removed from the company, Welsh Water have been able to charge their customers £27 million less than the maximum set by Ofwat this year. Any price increases are used to fund further investment. As a result, there has been no perception of pressure from the public on prices.

11. Glas Cymru felt that the current volatility of the financial markets would not affect the company’s ability to attract inward investment, but that the cost of capital meant that it would not be prudential to borrow more from the private markets at this time.

12. The not-for-profit nature of the company allows for greater long term planning and delivery as the Board works only for the interests of the company and makes no financial gain.

13. The setting up of the company in 2000 involved just 2-4 people. Glas Cymru reported that the team dynamic in those early days had a real effect on the success of the project.

14. In 2001, Glas Cymru issued bonds to raise the £1.9 billion needed to purchase Welsh Water. It was unsure whether the private sector would support the model, but the fact that they would have a secure income to service the debts gave investors confidence.

15. The Finance Director sees Glas Cymru as a good example of an essential structure for an essential service going to the private sector for backing without totally handing over the reins to the profit making sector. They encourage use of the private sector in a way that engages in a positive way in partnerships approached with eyes wide open.

16. Glas Cymru cannot be used as a ‘cookie cutter’ but lessons can be learnt from its operation.

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17. A risk transfer premium should only be accepted and paid where there was true transfer of the risk. Welsh Water is a low risk business and celebrates that fact with investors rather than paying an unnecessary premium.

18. Glas Cymru felt that its success, in part, was due to their business being controlled in the private sector rather than by Government. Clear outcomes should be set by the Government who should then release control to the business and allow people to deliver. Glas Cymru feels that the customer dividends are proof of their success in delivering the outcomes set. The Finance Director felt that total control should not be handed to the private sector but that private finance and the sharper edges of business should be brought into the public sector. Profits should be ploughed back into the business.

19. Glas Cymru recognises that a big upfront investment is necessary to improve any service. By issuing 50 year bonds, the company was able to secure the funds necessary for service improvement but at a cost not much higher than the Government could have achieved. The Government was unable to afford the investment at the time. The existence of the Tremorfa waste water treatment site, where before raw sewage was pumped straight into the Bristol Channel, would not have been possible without such investment. Glas Cymru has plans for further major investment to fund a fundamental change in the way water run off and drainage is managed.

20. Glas Cymru are now signing for a European Investment Bank (EIB) loan to fund further investment. They feel that other service areas in Wales could benefit from EIB support but that due to the complicated nature of the process and the EIB’s preference to work with large scale projects, an organisation to act as a conduit for that work might be useful.

21. Glas Cymru explained that the private sector are incentivised to efficiency save in order to make a return to shareholders. Glas Cymru do the same but return the profits to the company for investment and to the customers as dividends, thereby avoiding the problematic perceptions of PPP that have been formed after reports of excess profits being made by the private sector.

22. They also argued that spending to mend and make do can be expensive. Investment breaks the logjam and moves services forward.

23. The Glas Cymru model achieved change without the staffing issues highlighted to the Finance Committee elsewhere. Jobs at the waste water site are secure as the business is an essential service. A lack of investment before meant that the site, and therefore the jobs, did not exist. The static nature of the site also means that jobs cannot be transferred to other areas to save money and the workers are protected.

Committee Service November 2008

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Annex A2 – Rapporteur visit to Kommuninvest

Finance Committee Rapporteur Group visit to Kommuninvest Date: 20 November 2008 Location: Kommuninvest, Örebro, Sweden

Assembly Members in attendance Mohammad Asghar Alun Davies Nick Ramsay Joyce Watson Officials in attendance Abigail Phillips, Deputy Clerk

Others in attendance Maria Viimne, Deputy CEO, Kommuninvest Ulf Jivmark, Head of Legal and Documentation, Kommuninvest Göran Matteson, Head of Analysis and Secretary of Kommuninvest Cooperative Society Board Krister Frödin, Senior Lending Officer, Kommuninvest

Inquiry into Public Private Partnerships: Kommuninvest, the Swedish Local Government Funding Agency

Background

1. Sweden has a population of 9.2 million with an average of 22.2 inhabitants per Km2. The Kingdom is democratically governed through a central government, responsible for the judicial system, police, defence and higher education and through local authorities which are made up of county councils and smaller municipalities. The councils and municipalities each have responsibility for care of the elderly and children, education, transport, dental and medical care.

2. Swedish local authorities (both municipalities and county councils) are constitutionally equal to the Swedish central government as both can levy taxes. Involvement in local democracy is high with typically a 70 – 75% turnout for municipality elections.

3. The Median size of a municipality is 15,000 inhabitants, the average size is 33,000. Municipalities must legally be of a size that is workable and county councils have the power to force municipalities to merge in order to satisfy this requirement. As merging does not solve problems of rurality and does not improve financing this power is not generally used. However, it is felt that the power acts as an incentive for co-operative working between the municipalities.

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4. The local authorities and central government share responsibility for public sector services. Each has pre-defined areas of responsibility. To fund the public services, both the local authorities and the central government claim a proportion of income taxes appropriate to the proportion of services they provide. The state government collects direct taxes centrally and claims 30% of the revenue. Local authorities are then allocated 70% of the revenue. Income tax makes up 32% of the total direct taxes, of which local authorities takes a 92% share and the state 8%.

5. The local government’s share from direct taxes makes up 71% of local government revenues. A further 15% of local government income comes from state grants, 6% from charges and 8% from other miscellaneous sources.

6. An equalisation system operates in Sweden. The scheme has two main components: revenue equalisation (tax based) and expenditure equalisation. The system provides equal conditions among local authorities through transfers from the state and within the local government sector itself to ensure, for example, that rural areas with higher costs but lower revenue are not disadvantaged.

7. The Local Government Act stipulates that local authorities must maintain balanced budgets. If a deficit occurs, measures must be taken to cover the shortfall within 3 years. The same Act stipulates that local authorities cannot conduct speculative business.

8. Local authorities typically create arms length companies to provide housing and utilities and to deliver capital investment projects. The local authority would usually hold 90% plus of the shares. Companies of this sort would be guaranteed by the local authority, who hold taxation powers, and any profits made on the shareholders financial interest would be returned to the company and ultimately to the local authority.

9. In recent years, Sweden has consistently had unemployment rates that are lower than the Eurozone average and government debt levels at lower than Eurozone average. Swedish inflation is on par with the rest of the Eurozone area.

Kommuninvest, the Swedish Local Government Debt Office

10. Kommuninvest was established in 1986 by 10 municipalities and county councils in the Orebro area in order to create a more efficient way of sourcing funding for local government capital projects. A formal agreement was made between the 10 local authorities and a limited company was formed. Kommuninvest now has 290 member local authorities.

11. Kommuninvest raised $6-7 billion this year through the issue of bonds and carried out approximately 300 loan transactions with local authorities. 70% of the investment in Kommuninvest bonds was secured from foreign markets.

12. The purpose of establishing Kommuninvest was to increase the buying power of the local governments. It was recognised that local authorities were obtaining loans for capital investment from commercial banks at an interest rate approximately 2% higher than the state was able to secure. It was felt that local

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authorities with powers of taxation posed no higher a lending risk than the state but the banks were able to dictate terms as there was a limited lending market.

13. Kommuninvest secures investment from various financial markets, mainly through the issue of bonds. The members of Kommuninvest are then able to access that funding via low cost loans.

14. Due to its status as a limited company, Kommuninvest Members were required to deposit collateral in non interest accounts. As this was not ideal. Kommuninvest took steps to become a credit company, retaining its direct ownership. The company was then supervised by the Swedish financial services authority but required no collateral from its Members to guarantee lending activity.

15. The company’s status developed and Kommuninvest became a credit company owned by a co-operative society in order to facilitate easier growth in Member numbers. It is now known as a Credit Market Company owned by a co-operative society.

16. Kommuninvest has considered seeking permission to become a bank in its own right, but this request was withdrawn to allow them to consider another option that presented itself. Kommuninvest are still considering this new possible option of becoming a municipal financial federation. Although details regarding the future status of the company are unclear at this stage, Kommuninvest is confident that they will survive the current economic climate and continue to grow. Such confidence is, in part, derived from their survival of the previous banking crisis in the 1990’s.

17. Kommuninvest employs 43 full time staff with a mixed background in the public and private sector. The size of the company is designed to be large enough to have the necessary expertise and capacity to manage the work load, but small enough to keep the work focused and resist pressure to branch out into areas best covered by commercial banks.

18. There has been little support from the state or from the commercial banks, for Kommuninvest and there are no explicit guarantees between the central government and local authorities that underwrite loans. However, the central government ultimately holds responsibility for local authorities and is therefore implicated in the process.

Membership of Kommuninvest

19. Before Kommuninvest was established, local authorities would typically issue bonds to raise finance or would borrow from commercial banks. All 290 Municipalities and 20 county Councils in Sweden managed their finances in this way acting independently of each other.

20. Local authorities are able to become Members of Kommuninvest provided their budget is balanced, they are able to pay a sum upfront and they are willing to sign a guarantee. The guarantee states that the Member local authorities ‘jointly and severally guarantee as for a liability of their own, all obligations, liabilities and commitments presently and subsequently undertaken by Kommuninvest’. This guarantee jointly commits all members to provide

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unlimited cover to all Kommuninvest liabilities and underpins Kommuninvest’s low risk status.

21. Members become shareholders with the share size dependent on the number of inhabitants in their authority. Although share size is proportional, each member authority holds just one vote. There are currently 226 Members of Kommuninvest representing 80% of all municipalities and 35% of county councils. Kommuninvest predicts that the membership numbers will continue their steady rise and that they will achieve full membership by 2015. Kommuninvest feels that full membership will secure the survival and competitiveness of the company thereby achieving better terms and conditions and better efficiency overall.

22. Once Members have joined, they are able to apply for loans that vary in terms from 5 to 20 years. Average lending levels are 25 million SEK (£2.05 million) with the smallest loan to date amounting to £80,000 and the largest £100 million. The loans are typically used for capital infrastructure investment although loans can legitimately be used for anything within the local authorities remit. Current borrowing rates are typically 5.2%.

23. Loans are provided with 0% risk weighting as Kommuninvest is one of only two Swedish organisations that have the highest possible credit rating. The other is the Kingdom of Sweden itself.

24. Kommuninvest is generally approached as just one possible financier when local governments are seeking funding yet the company holds a 45.7% share of all Members borrowing. Its outstanding loan portfolio stood at USD 12.2bn in 2007 and is expected to reach USD 27bn in 2015.

25. As well as offering competitive rates for loans, members of Kommuninvest are able to access expert financial advice on prudent management of their resources. Members who declare a budget deficit are required to resolve the situation within 3 years or face possible expulsion from the co-operative. Members’ rights to borrow can be suspended if its budgets show a deficit.

26. As a company owned by the public sector, Kommuninvest said that its purpose is unlike that of a commercial bank. It acts as spokesperson for local governments and works for the public sector with local authorities as its shareholders. It operates as a member-only not-for-profit organisation that supplies local governments with long term financial solutions. Kommuninvest further claims that the mixed background of its staff from both the public and private sectors places it in an ideal position to act as a link between the two sectors working for the public sector to secure private sector investment.

27. Municipalities often create companies to provide housing or utilities. Provided these companies have the local government as their majority share holder, they too can borrow from Kommuninvest. The company’s liabilities to Kommuninvest would be underwritten by the guarantee the local government made to Kommuninvest at membership.

28. Kommuninvest said that there is greater competition between banks now than there was before the company was established. Local Authorities now have

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greater choice in loan provider and prices have been driven down through competition.

Investment in Kommuninvest

29. The local government taxation power and the inexplicit links between local government and central government offers investors two layers of guarantees for their investments.

30. Investment is sought from a wide range of financial markets with stability and prudence in mind. Kommuninvest focus on diversifying sources in order to strengthen their resilience to market fluctuations. The company has high activity in Japanese, Swedish and Danish markets and new markets are currently being evaluated. The liquidity risk is minimised by market diversification. The security of Kommuninvest’s position is attractive to investors, especially in volatile economic climates.

31. Investment terms last between 1 month and 30 years and Kommuninvest are flexible in the products they offer. The average maturity is 14 months.

32. Kommuninvest accepts no exposure to sub-prime, ABS or CDO investments. This prudent approach to investment offers protection to their investors, Members and to the company. Kommuninvest has never sustained a credit loss.

33. Kommuninvest also markets investment in the company as investment in Sweden. They feel it is important to give investors the sense that what they are doing is good for the people of Sweden as well as a sound financial investment.

Committee Service November 2008

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Annex A3 – Rapporteur visit to Örebro City Council

Finance Committee Rapporteur Group visit to Örebro City Council Date: 20 November 2008 Location: City Hall, Örebro, Sweden

Assembly Members in attendance Mohammad Asghar Alun Davies Nick Ramsay Joyce Watson Officials in attendance Abigail Phillips, Deputy Clerk

Others in attendance Anders Olsson, Chief Financial Manager, City of Örebro

Inquiry into Public Private Partnerships: Örebro City Council

Background

1. Örebro has a population of over 130,000 living in an area 13801 km2. The city has a student population of 14,500. 12,000 companies operate in the area but 30% of people of working age are employed by the city council.

2. Örebro City Council councillors work for the council on a part time, paid basis with many holding other part time positions in the area. The City Executive Committee oversees the councils operations. Working under that committee are 22 other committees split for the most part into three programme areas.

3. Örebro City Council owns 6 companies set up to facilitate efficient service provision. Some companies, like those established to provide housing and industrial buildings, are expected to remain under council control. However, companies like that set up in Örebro to provide a commercially operating adventure pool and camping facility for the city, are expected to be sold to the private sector in due course. Any profits from the sale of that company would be returned through the council as shareholders to the city.

4. One such company was set up to provide broadband services to public buildings, schools and other institutions. Having created the necessary infrastructure, the city now offers broadband services to private companies and individuals at a competitive price. It is envisioned that this company will remain under the control of the council.

5. Companies are set up in this way in order to separate the different functions of the council. It is felt that the companies provide a focus of purpose and clear

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financial accountability. Housing companies owned by the local authorities are not permitted to make a profit but other companies are.

Financing issues

6. The total budget of Örebro City Council is 5.5 billion SEK (£445m). The council currently has a 400 million SEK (£32.5m) outstanding loan portfolio.

7. The amount of loans outstanding is not shown on revenue balance sheets, only the interest paid is included. There are currently no national standards of accounting in Sweden although the International Financial Reporting Standards will apply to the country from the start of the next financial year.

8. Örebro City Council was one of the founding authorities of Kommuninvest. It hoped to increase its buying power as before the establishment of Kommuninvest local governments were paying more than housing companies and central government for loans.

9. Before Kommuninvest, Örebro City Council had 2 banks that they could approach for loans. Now they can expect tenders from 6 lenders, including Kommuninvest, when they are seeking finance.

10. Örebro City Council can issue bonds independently of Kommuninvest but could not do so on a scale that could compete with Kommuninvest so choose not to.

11. Although loans to Örebro City Council are ultimately guaranteed by their tax raising powers, the central government retains the power to restrict any increases in tax. In reality, it is recognised that although the power of taxation remains to be the best guarantee to lenders, borrowing should be kept at a prudent level to avoid any increase in taxes for repayment purposes.

Committee Service November 2008

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Annex A4 – Rapporteur group visit to Shaw Healthcare

Finance Committee Rapporteur Group visit to Shaw Healthcare Date: 27 November 2008 Time: 12.00 – 2:00pm Location: Shaw Heathcare, St Mellons, Cardiff

Assembly Members in attendance Angela Burns (Chair) Mohammad Asghar Officials in attendance Abigail Phillips, Deputy Clerk

Others in attendance Jeremy Nixey, Chief Executive, Shaw Healthcare Russell Brown, Group Finance Director

Inquiry into Public Private Partnerships: Shaw Healthcare

1. In 1989, Shaw Health developed its first home in partnership with a local health board. Since then the company has grown largely through partnerships with the public sector.

2. Shaw now employs 2,832 people to provide care to over 3,000 individuals in registered care homes, hospitals, supported living arrangements, retirement schemes and domiciliary care settings. Its turnover in 2007/8 was £85 million.

Shaw’s model

3. Shaw Healthcare builds and manages healthcare facilities. Some of the services it provides on any one site are contracted by local health boards and some are provided as a marketed service, creating a revenue stream for Shaw. Shaw feel that as the public sector provides them with a lower level of ‘underwriting’ (ie share of the overall level of business) than in a traditional PPP project they are able to be more creative and innovative in their approach to care provision.

4. In order to finance a new development, Shaw would establish a 100% owned Special Purpose Company. The company would borrow 75% of the required capital from a senior lender, usually a bank. A further 20% of the capital would be sourced as subordinated mezzanine funding from Shaw Homes (Shaw Healthcare’s parent company) or pension fund and the final 5% would be sourced from Shaw Group equity. Although Shaw do not require an upfront investment from the local authority, they are flexible about the terms of partnership and have accepted upfront capital or investment from prudential borrowing in past projects.

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5. Shaw would enter into a contract with the public service to provide services, typically over 20 years. Shaw’s contracts with the public sector have not contained the penal termination provisions of traditional PPP contracts. Shaw see these penal clauses as inapplicable to them as they take a greater proportion of risk in the project by contracting only a small proportion of services and offering the rest on a marketed basis.

Ledbury project

6. Shaw Healthcare was approached by Herefordshire Health Authority to provide a scheme that could replace their existing 13 bed cottage hospital with a new facility for the 9,000 people of Ledbury. The old facility was out dated, inefficient and non-compliant with health and safety requirements. PPP bids had been invited for the project but were unaffordable by the Authority.

7. Shaw agreed to provide the buildings and facilities required by the health authority. The heath authority would then contractually lease 14 intermediary care beds from Shaw over the next 20 years. Further contracts provided for the lease of a surgery for 6 GP’s, a 24/7 Minor Injuries Unit with a nurse led A&E service, a serviced office let to Social Services and the lease of an outpatients clinic.

8. Shaw also provided on a marketed basis 36 nursing home beds, 12 Acquired Brain Injury beds and various community services and facilities such as a café. Provision was also made for a pharmacy but a licence to provide that service was not granted. The café has since closed due to a lack of footfall.

9. Initially pre- and after-school childcare services were provided at the site. Shaw saw this as beneficial to the patients of the hospital as well as the children and parents using the facility as the elderly patients enjoyed seeing the children. That service has now been withdrawn due to the tightening of Ofsted regulations. However, the space is offered for other community uses.

10. Beds at the hospital are provided to patients free at the point of delivery. The 14 beds contractually leased by the Local Health Board are supplemented by the lease on a non contractual basis of other beds in the hospital when needed. These are also available to patients on a private or insurance funded basis.

Barton project

11. The Shaw Healthcare facility at Barton is provided in a similar model to Ledbury. However, at Barton there are also 29 extra care flats that were made available on the open market to individuals. Residents of the flats are able to purchase domiciliary care services from Shaw as and when such services are required. In other projects flats were made available on a rental basis with Local Authorities subsidising rents above and beyond the Housing Benefit rates. However, none of the flats at Barton were to let.

12. Individually the marketed services provided by Shaw would not be viable. However, put together they can achieve critical mass which is further strengthened by other income generating elements of the project such as contracted bed spaces and extra care flats. The capital cost to provide care beds is equivalent to £100,000 per bed. Shaw feel that its utilisation of several

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possible revenue streams at each site proves security for the investment in and provision of healthcare services.

Staff Issues

13. TUPE and TUPE+ provides a framework for staff transfers from the public sector to private sector and its provisions apply to staff affected by Shaw Healthcare projects.

14. Shaw sees the TUPE and TUPE+ frameworks as problematic. They see staff as the biggest risk they take in any project and feel that being made to take on staff that may be unsuitable for the new service provision could deeply affect the success of the project. Shaw reasoned that where services have been managed by public bodies there were often issues with underperformance and poor management. TUPE and TUPE+ did not allow for a change of leadership at management level and thereby prevent a change of culture within the organisation.

15. Shaw felt that the benefits of the private sector over the public sector were that staff had the power to make change, were given room to use their initiative and had responsibility for outcomes. They felt that under the protection of TUPE and TUPE+, these benefits could not be fully realised as the staff were not sufficiently held to account for their performance. Shaw felt that the only management tool available to them was performance management reviews which could result in a lengthy change process causing delays to the necessary culture change.

16. Shaw required its staff to be multifunctional but cited experience of staff transferring over as being unwilling to do so. Such staff left their posts and did not transfer. Shaw projects typically employed 8-10 whole time equivalent nurses with the other 90% of staff made up of cleaners, cooks and non-professional care staff.

17. Shaw felt that a staff concordat between the public and private sectors could be workable provided that it allowed for a change of management. However, Shaw doubted that such a concordat could be negotiated.

18. Shaw felt strongly that the survival of the company should be prioritised above individual staff issues all jobs would be lost should the company collapse.

Difficulties of new provision

19. Shaw felt that staffing issues were crucial to any project.

20. Shaw also felt that inheritance of poor practice put pressure on them as a new service provider. They cited incidences when they felt that a blind eye was turned to bad practices such as mixed wards under the Local Authority regime but as soon as they took over provision of that service they were pressured to make immediate improvements.

21. Shaw was concerned that the public procurement and tendering process are restrictive and unattractive to the private sector. Shaw no longer responds to tenders choosing instead to work speculatively where they can. They felt that if

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the tendering process were simplified, they could provide 15 – 20 care homes in Wales.

22. Shaw felt that it was vital that the private partner had control of development and management. The public partner should select a partner, specify its service requirements, indicate a price range and step back to allow the public partner to deliver. Without this approach, it was difficult for to realise the benefits of partnering.

Value for Money

23. Shaw provided figures that showed the cost of Shaw’s healthcare projects to be lower than that of a traditional PPP project. No comparison was made between either partnership option and a public sector only project. However, Shaw said that as government spending was funded by long term borrowing such as bonds, the cost of that should be taken into account when making such comparisons.

Future projects

24. Shaw considered their model to be workable for any sized project that was a purely service based model with no capital element.

25. Shaw stated that they could greatly expand their service provision if the tendering process was simplified.

26. Shaw felt that individual budgets and direct payments would allow patients to move away from Government controlled health provision and open the market up for more private healthcare projects like Shaw’s. Direct payments are cash payments made by local authorities to individuals who have been assessed as needing services, in lieu of social service provisions.

Committee Service November 2008

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Annex A5 – Rapporteur group meeting with Partnerships UK

Finance Committee Rapporteur Group discussion with Partnerships UK Date: 11 December 2008 Time: 2.00 – 4.00pm Location: Assembly Offices, Cardiff

Assembly Members in attendance Angela Burns (Chair) Mohammad Asghar Nick Ramsay Jenny Randerson Joyce Watson Officials in attendance Abigail Phillips, Deputy Clerk John Grimes, Clerk (part of meeting) Eleanor Roy, MRS

Others in attendance Michael Gerrard, Deputy Chief Executive, Partnerships UK Owain Ellis, Project Director, Partnerships UK Background 1. Partnerships UK (PUK) developed from the Treasury Task Force set up in 1997

by HM Treasury to help promote PFI/PPP expertise within government. Its revenue comes wholly from the public sector; 20% of its revenue comes from work it does for the Treasury and the remainder from other public bodies such as central government departments, NDPBs, local authorities and devolved governments who pay for the services of PUK on a demand led basis. The advice and guidance of PUK is potentially available to any geographical area of the UK that requests their services.

2. As PUK is 45% owned by HM Treasury, 4% by Scottish Ministers and 51% by a number of banks and private institutions it is itself a PPP classified to the private sector. This allows PUK to be at arms length from the government and provides it with the powers to borrow, although they have not done so to date as it has access to sufficient equity funds. The formation of PUK required legislation.

3. PUK provides a ‘corporate memory’ for PPP skills in the public sector that would be otherwise hard to retain. Its 60 members of staff are professionals with backgrounds in the public and private sector.

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Working with others 4. PUK offers a range of services. They can offer help for individual projects or in

setting up new advice or delivery units. They have provided ad-hoc advice on a demand led basis, secondment of PUK staff to projects and an ongoing presence on project boards. PUK tailor their services to meet the needs of the client.

5. PUK also feeds into UK Treasury PFI/PPP policy formation and provides a quality control regime for PFI projects that, as a result of public finance rules, are ultimately subject to Treasury approval.

6. The work of PUK could overlap with the work of 4PS, a Local Government regulated body. However, 4PS and PUK are aware of the risk and manage it. As a demand led service, PUK felt that it would be unlikely that they would be asked to advise on a project at the same time as 4PS.

The Welsh situation 7. If a central PPP advice unit were formed in Wales, the projects it advised on

would be outside of Treasury control as such projects would be financed from the devolved budget. However, any capital PPP projects in Wales may appear ‘on balance sheet’ as a government asset. Under accounting rules, loans taken out to provide the capital asset may also be ‘on balance sheet’ and would class as a government loan, coming under Treasury rules regarding levels of national debt. Any such debt would result in a reduction to the total Welsh Consolidated Fund to offset the debt, thereby negating from an affordability standpoint the extra funding sourced through private financing.

8. PUK clarified the situation in Scotland where the Scottish Government does not have the powers to borrow from the market, although Local Authorities in Scotland, as elsewhere, do in accordance with the Prudential Code. The limited tax raising powers of the Scottish Government could, in principle, provide incremental tax revenue cover for borrowings which would not erode the affordability ratios of the UK government borrowings as a whole. Any borrowing above the level the Scottish Government are able to raise through taxation (assuming the necessary powers were granted for such borrowings) would fall under the Treasury rules regarding national debt so as to have consequences for the Scottish Consolidated Fund.

9. PUK would not carry out a regulatory function on behalf of HM Treasury in regard to a Welsh central PPP advice unit (e.g. in respect of standard contract terms) as the devolved budget has no direct Treasury control.

Why PPP? 10. PUK explained that although PPP may be seen as a long-term, somewhat

inflexible financial commitment, in certain circumstances, so too is the financial commitment involved in building a hospital in more traditional ways. The cost of finance is just one of the costs involved in any project and the overall cost and value for money should be considered. Low cost finance is not a guarantee of efficiency.

11. PPP may provide better value in delivering some projects. PPP as a tool provides contestability in the procurement process. It ensures a comparison of approaches and that risk and total cost are considered at the outset.

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12. PUK also pointed out that PPP guarantees the lifetime of public assets and builds in proper maintenance regimes. Traditional procurement can disguise savings on maintenance as prudence when it is in fact bad management.

Risk Transfer 13. PUK said that it is not possible to transfer away the ‘risk’ of public service

continuity and this needed to be recognised. It is only possible to delegate an aspect of the delivery of that service under PPP.

14. ‘Aspirationally’, investment is made in outcomes but risk cannot often be transferred in that case. In most cases risk transfer is only realistically achieved through output based procurement. For example, the risk of building a suitable learning environment can be transferred. The risk of attaining improved educational standards cannot under current PPP methodologies. There are, however, examples of outcome based risk transfer in some sectors.

15. PUK are aware of incidences of PFI sub-contactors becoming insolvent. In such cases, the public sector has insisted that the PFI contract is delivered by the private partners and the projects have been completed. In some cases, the financiers of the partnerships have lost a considerable amount of money. In a similar circumstance under a conventional procurement route, the public purse would have made the loss. A Tower Hamlets schools PFI project was cited as an example of a project in which the private partners suffered a financial loss following the collapse of a sub-contractor. The public purse was protected by the private finance in that case.

16. PFI effectively protects the public sector against substantial cost over-runs, for example potentially up to twice the budgeted capital cost of the project should sub-contractors become insolvent or should other major risks materialise. Beyond that, the public partner would have the choice of continuing with the project and incurring costs or not.

Process and contracts 17. In PUK’s experience, best value is achieved during the process of agreeing the

contract terms with bidders under competitive pressure. Conversely, pressure to close a contract within certain inflexible timescales can in some instances lead to erosion of value for money. The use of standard contracts where possible greatly reduces that risk. However, the use of long term fixed price agreements will not always be the best option.

18. Standardised contracts may also allow legal representatives to quote a fixed price rate for advice, thereby eliminating some uncertainty from the setting up costs.

19. Standardised contract terms that are currently being used in PFI are 4th generation and have been informed by lessons learnt in build, operational and sign off phases of earlier contracts. The standard contract terms have always allowed for a reduction in the unitary charge during the final years if there is a risk that the asset will not be returned to the public sector in the contracted condition. A fund to carry out any outstanding maintenance can then be created at no extra cost to the public purse.

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Partnership opportunities 20. Finding the right partner is essential to any PPP project. Both partners should

be committed to the project and have a clear vision of their role in the partnership.

21. The Public Sector should approach the private sector with a market engagement strategy and an understanding of the private sector’s constraints and issues.

22. The public sector partner should plan its programme to ensure that supply and demand can be brought into balance on value for money terms. Contracts can be constructed to encourage the involvement of local SME’s where possible.

Staff 23. The extent of TUPE transfers of staff varies from sector to sector, but in a large

number of sectors large scale transfers are now less common. Concerns around the creation of a two tier work force have been addressed through “TUPE +” arrangements and, in Scotland and Northern Ireland, through the concordats reached to implement these.

24. As part of the overall risk transfer arrangements, facility management duties are normally transferred and, where there has been pre-existing FM staff, these will normally transfer to the private sector contractor.

25. Building design should allow for consultation with the end user for best results. Staff are best aware of the environmental conditions needed to do their jobs and early consultation will avoid problems later on.

Alternative models 26. Housing Associations are examples of alternative forms of PPP. Their

expenditure is secured against housing benefits and affordable rents. They have a regulated structure that is at arms length from local authorities, but they work together to ensure the housing needs of the community are met.

27. Collective prudential borrowing could, in principle, be achieved by local authorities. For example, Local Authorities could issue bonds (once the bond market returns to normal functioning) to raise finance with each local authority liable under a ‘several’ obligation basis for debts up to their own prudential borrowing limits. By acting collectively, local authorities could, in this way, exercise their bulk purchasing potential for improving the terms of finance available.. They could also combine small projects that may be less suitable for a PPP approach with other projects to create a package deal that is more attractive to the private sector. If used in Wales, the Welsh Assembly Government could ring fence financing to local authorities in order to ensure a strategic approach. A central PPP unit could help facilitate collective prudential borrowing and would act as a driver for the relationship between authorities.

28. Toll based concessions could also be used in Wales. A ‘decelerator’ to cap tolls would ensure that unreasonably high profits could not be made by private partners and in the case of road provision particularly, would ensure that the polluter pays. It was recognised, however, that tolls are considered unpopular in the UK.

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Issues to consider 29. There cannot be a ‘one size fits all’ approach to provision of public services.

Each project should be analysed in the context of the environment and the sector as a whole. Macroeconomics should be considered too.

30. Time should be given to the proper consideration of the long term nature of PPP contracts. Such contracts do not have a patch and mend philosophy to asset maintenance and, as with any major investment, there should be a close relationship between up-front design and the future maintenance regime to achieve overall best value for the tax payer. Timescales and expectations need to be carefully managed to ensure success.

31. A managed programme which releases a steady demand to the private sector will gain best value for PPP projects.

32. Political leadership, good project governance and management are key to the success of PPP projects.

Committee Service December 2008

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Annex B1 – Terms of Reference

Finance Committee Inquiry into Public Private Partnerships Terms of Reference

To examine the scope for drawing on private finance for public sector projects with particular reference to:

1. the potential benefits, costs and risks that may be involved;

2. any policy changes (whether to remove barriers or apply controls) that may be needed to realise the optimum outcome; and

3. practical guidance to enable the public sector to strike the most advantageous arrangements within the agreed policy framework.”

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Annex B2 – Summary of Conclusions and Recommendations made in ‘Inquiry into Public Private Partnerships’ September 2008

1. There is a major challenge facing Wales in meeting its future needs for capital investment in public services. However, the issue is not unique to Wales and in its inquiry the Committee learned how others had addressed similar situations. The Committee has noted some impressive achievements, in particular in Scotland and Northern Ireland, which indicate the kind of opportunity that can be available from partnerships with the private sector and the kind of public service that could be available for the people of Wales.

2. Nonetheless the Committee recognises that there are some strongly held, and

justifiable, concerns about the way in which public private partnerships have operated in the past – particularly some of the earliest Private Finance Initiative (PFI) schemes. These issues need to be recognised and the Committee was greatly encouraged to learn that others have done just this and that ways have been found to resolve, or at least ameliorate, many of them.

3. A key issue that emerged regularly through the review was the need to develop

skills within the public sector in Wales. While there was a widespread acceptance that the private sector was, at present, often more successful at completing projects to time and budget, there was also a general view that the public sector should be able to do just as well if it had the opportunity to do so and was given the skills. The Committee feels this is an issue that should be addressed and recommends that the Welsh Assembly Government (WAG) should come forward with proposals for developing and strengthening these skills within the public sector generally.

4. A major conclusion was a widespread lack of skills in relation to constructing,

negotiating and managing partnerships with the Private Sector and these need to be developed in Wales. The Committee recommends that the Welsh Assembly Government establishes a central body or unit to promote and support partnership projects with the private sector.

5. A critical part of the unit’s role will be to ensure that the expertise gained in one

project is used to inform and support subsequent projects. The Committee therefore recommends that the central unit should take a lead role, with local management, in developing project specifications, negotiating contracts with the private sector partner and monitoring and managing performance in relation to the contract.

6. The work of such a unit would be greatly helped if this could be set within a

longer term framework which would provide a clear perspective within which both the public and private sector can plan. The Finance Committee therefore recommends that the Welsh Assembly Government publishes forward plans for its capital/infrastructure programme including setting out the funds that were expected to be available. This work would sit alongside the work of the Strategic Capital Investment Board that WAG is developing. It would also ensure that Wales’ capital programme was developed as a cohesive whole matching Wales’ needs with the range of resources available.

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7. The Committee has noted the approach in Scotland in which at the outset there

was a clear statement of which staff would transfer to another organisation as part of a partnership project. It noted also the development of a ‘concordat’ as a broader, agreed framework covering the terms and conditions that apply to both new and transferred staff. The Committee recommends that the Welsh Assembly Government should, as a matter of priority, work with the Trades Unions and Employer Organisations to develop a similar concordat for use in Wales. This might be a first task for the new Central Unit although the committee recommends that the Government does not delay in developing the concordat in the event of there being a delay in the establishment of the Central Unit.

8. A particular challenge in developing Public Private Partnerships (PPPs) in

Wales will be to reduce the time and bureaucracy involved in setting them up. The Committee feels it ought to be possible to develop further standardised and simplified legal processes for the establishment of these partnerships.

9. The Committee noted a fundamental imbalance in the way that maintenance is

handled via the traditional public sector procurement route and for PFI/PPP projects. The Finance Committee considers the Welsh Assembly Government should seek to develop systems by which the necessary ongoing maintenance of assets, including the funding for this, is built in at the start. The public sector needs to adopt an approach in which investment, having been made, is protected into the future.

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