Tony%20Williams%20Building%20Value%20Ltd%20the%20independent%20strategic%20advisor%20to%20the%20building%20materials,%20construction%20

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Tony WilliamsBuilding Value Ltdthe
independent strategic advisor to the building
materials, construction support services
sectors

• 6 December 2002

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Infrastructure improvement in Europeprivate
and/or public? Private Finance Initiative in
UK another fine mess you got me intobutthe
report of my death was an exaggeration
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PFI

• Established in 1992 (by a Conservative
  government)
• Alternative method of procuring services for the
  public sector
• Build now, pay later just like hire purchase
  and government eventually owns the asset
• Revenue not capital spend ex-PSBR
• Public Private Partnerships (PPP) employ joint
  capital ownership does not revert to government

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Another fine mess.

• Current witch hunt on PFI
• Blanket media criticism
• Focus on project delays costs value ideology
• Accounting practices have been questioned
• Controversial proposed PPP of Londons
  Underground Railway

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Report of death is an exaggeration

• 100 billion worth of schemes
• - 22 billion completed
• - 14 million where formal contracts signed
• - 64 billion of schemes in the pipeline
• This compares to annual UK construction output
  worth circa 80 billion

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Eurotunnel share price
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British Energy Share Price
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What are the main issues?

• Timing and cost
• Government is cheapest borrower
• Value for money transfer of risk for
  Government
• Off balance sheet funding
• Re-financing and windfall profits
• Build now pay MORE later

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Amey share price
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Pressure on public funding
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Positives

• Need - 100 billion worth of schemes to date
• National regional government support
• Abundance of capital
• Returns are attractive
• Participants see higher quality earnings

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Negatives

• Protracted development and project delays
• Costs and value for money / windfall profits
• Bureaucracy / ideology / negative surveys
• Poor privatisation record
• The contractor
• Accounting

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Solutions 1

• Positives exceed negative WACC by 22
• Half the negatives are logistical timing
  bureaucracy accounting negative surveys
• Re-definition needed plus education, training and
  establishment of a new PFI executive
• The accounting issues are on the mend.
• ----and why not blow PFIs trumpet?

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Solutions 2

• New practices, accounting standards forecasting
• Industry rationalisation will help
• Standard contracts to streamline procurement
• Commoditisation and bundling
• Finance raised in form price that reflects risk

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Solutions 3

• Role and responsibility of government needs to be
  agreed
• A strong owner in place from the outset
• Replace contractor as front man
• A full empirical audit of PFI

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Value for money test is flawed

• Is private provision of services better than
  public?
• Build cost of asset is the yard stick it is
  called the Public Sector Comparator (PCS)
• Alternative is to rent asset over 25, 30 or 40
  years
• This is the basis of comparison
• Government asks which is cheaper buying an asset
  or buying a service?

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Apples with Oranges

• Cannot compare build cost with rent of same asset
  over number of years is wrong
• Net Present Value (NPV) of rents is massively
  risky
• Rents need large discount due to scale of
  uncertainty
• If not, then NPV of rents is grossly
  over-estimated...
• and building the asset will look more attractive

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Discounting rent vs capital cost

• Government traditionally uses 6 discount rate
  (and Treasury proposes change to 3.5)
• PFI projects are long lived
• Consequences of small differences are huge
• If PFI discount rate is wrong by 1...
• then cost of private provision maybe
  overestimated by 14 of a 40 year project

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Value for money (VTM) test fails

• Contrary to popular conception, VTM universally
  underestimates private sector provision
• - failure risk user pays only on receipt of
  service
• - inherent risk of service the asset may not be
  busy
• - quality of private service is not recognised
• - potential for productivity is ignored (as
  focus for government is reduced
  cost)

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What needs to change?

• Different discount rates for PFI projects and PSC
• Study sensitivity of existing projects
• and look at those which failed
• Reassessment of the reassessment procedures
• Need a clear idea of PFIs financial benefits

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PFI conclusions

• A debate that can be won
• Vital for infrastructure provision public
  services
• Vital for economic growth
• Vital for sound public finances
• It is competitive and.
• .there is a wall of money for PFI to scale

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• I am not going to go to parents and children
  and patientsand say Im sorry because theres an
  argument about PFI were going to put these
  projects on hold.
• They dont care who builds them. So long as
  theyre built.
• I dont care who builds them
• Tony Blair, British PM, Sept 2002

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