1. business and industrial
2. construction

Changing partners – How to get
the best from PFI/PPP
Ed Bartlett & Gary Moss
Introduction
• “Two key processes in PFI/PPP projects:
construction and on-going management –
what is the role of FM in each?”
•
•
•
•
•
Overview of the UK PFI/PPP Market
PFI/PPP Procurement basics
The role of FM in PFI/PPP projects
How to add value to a PFI/PPP bid
The importance of whole life thinking
Cyril Sweett Background
• One of UK’s leading independent cost & project management
•
•
•
•
•
consultancies
400 staff, £27m fee turnover
PFI Market leader
Involved in 100+ PFI/PPP projects to date
Working for bidders, funders, public sector, contractors & FM
providers
Current PFI projects include:
• Health: Barts & London, Newcastle, Manchester, Cambridge
Addenbrookes, Oxford, Durham, Fife
• Education: Sheffield, Gateshead, Barnsley, North
Lanarkshire, Clacton, Exeter, West Lothian, Waltham Forest
• Defence: Northwood NATO HQ, Allenby & Connaught
barracks, RAF Honnington
Overview of the UK PFI/PPP
Market
PFI/PPP Drivers
– 564 PFI deals with a capital value of more than £35bn have been signed.
Source: Chief Secretary to the Treasury, Rt Hon Paul Boateng MP, 11 June
2003
– Investment in schools PFI since 1997 will total £3 billion.
Source: Baroness Ashton, Education Minister, speech 26 March 2002
– In 2005 there will be £5.2 billion Government spending on Schools. This
is part of a £30-45 billion investment over the next 10-15 years. Starting
later this year, a programme for £2.1bn spending on 'Building Schools
for the Future' will commence.
– There have been 68 major hospital developments worth over £7.6 billion
since 1997 with 64 of these involving private finance.
Source: John Hutton MP, Health Minister, speech 18 March 2002
– Total investment in public services is increasing from £23.7 billion in
1996-97 to £40.5 billion by the end of 2003/4. The PFI element will
increase from £1.5 billion to over £3.5 billion.
Source: Deputy PM speech, 28 May 2002
– 81% of public bodies involved in PFI projects believe they are achieving
satisfactory or better value for money from their PFI contracts.
Source: National Audit Office, November 2001
Spend: 1997-2005
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
19
97
/9
8
19
98
/9
9
19
99
/0
0
20
00
/0
1
20
01
/0
2
20
02
/0
3
20
03
/0
4
20
04
/0
5
20
05
/0
6
£m
PFI/PPP Growth
Year
* Includes predictions from non Government sources for 2003-2005 for Health and MoD
PFI/PPP should:
• Be more innovative in design, construction,
•
•
•
maintenance and operation;
Create greater efficiencies and synergies between
design and operation;
Invest in the quality of the asset to improve long
term maintenance and operating costs;
Manage risks far better – the discipline of the market
place provides better incentives - so that projects are
delivered on time and within budget.
[source ODPM]
Current PFI/PPP Initiatives
•
•
•
•
•
NHS ProCure 21
NHS LIFT Projects
DfES Building Schools for the Future
MoD PRIME Contracts
Private Sector Property Outsourcing
PFI/PPP Procurement
PFI/PPP Basics
• Long term outsourcing to private sector
• Procurement & financing of facilities & services
• Operation of facility/service for typical 25-30 year
•
•
•
•
concession period
Risk transfer to service provider
Single point responsibility
Guaranteed annual income
Contracts based on defined
service delivery criteria
Key Issues in PFI/PPP - bids
•
•
•
•
•
•
•
A highly competitive market
Well-known affordability benchmarks
Bidding process can be protracted
Bid costs can be enormous
Bidder will expect some risk sharing
Bidders are seeking long term involvement
PFI projects are getting bigger & more complex:
• Dumfries & Galloway Schools: 130 schools
• MoD Allenby & Connaught: 7000 SLA
• Barts & London Hospital: £650m capital spend
• Norfolk Schools: 78 schools
Key Issues in PFI/PPP - spend
• Getting the right balance between capital and life
•
•
•
•
•
cycle spend
Hand-back requirements at end of contract
Dealing with change & obsolescence
Making the financial model stack up
Sensitivity Analysis: inflation, discount rates,
durability assumptions
Double-counting in the
cost models
Key Issues in PFI/PPP - FM
• To create and sustain an environment that
achieves the customer’s requirements and is
continuously:
– Secure and safe
– Available and operational
– Statutorily compliant
– Proactively managed
– Good value for money
PFI/PPP Market Place – Bid Process
• ITN issued with Output Specification for Project
• Invitation to Negotiate – ITN – Av 4 bidders
– Prepare and submit over 2-3 months
– Architect/Structure/M&E – Stage B Design 1:200
– Firm Build,FM and Lifecycle Costed solutions
• Best and Final Offers – BaFO – 2 bidders
– Further refinement of Design and solutions
– More detail into lifecycle modeling but no increase!!
• Sometimes LaFO – Last and Final Offers or
• Preferred Bidder - negotiation to contract close
– Price generally lower than ITN unless client change
– Design Development is team risk – mostly FM !!
Defining Service Requirements
• Main contract – “Project agreement”
• Construction and FM sub-contract
• Project Output Specification:
•
• Defines what outcome is required
• Unlikely to define how it is to be achieved
• Considerable scope for innovation
Project Payment Mechanism:
• Availability payments – based on objective
standards
• Performance payments – based on quality of
service delivery
• User charges, e.g road tolls
• Volume/usage payments – based on level of use
+ Robust payment deduction mechanisms
PFI Payment Mechanisms
Conventional Asset Procurement
Cost Overrun
Cost Overrun
£m
Time
Overrun
Ï
Capital Cost
0
3
Estimated Running Costs
25
Years Î
PFI Procurement
Ï
Unitary Payment
£m
0
3
25
Years Î
Capex v Opex (e.g. Hospital real £)
Portering
5%
Helpdesk /
Reception
1%
Receipt &
Distribution
1%
Security
2%
Car parking
2%
Capex
38%
Laundry
5%
Cleaning /
Domestics
9%
Catering
11%
FM
management
5%
Hard FM
10%
Life Cycle
Replacement
11%
The role of FM in PFI/PPP
projects
&
How to add value to a bid
Integration of Roles and Functions
Design
Construction
Ongoing
FM
Opportunity to
realise best
value
Feedback
• Feedback on buildings in use – the missing link in
procurement
Finance
Design
Feedback
Build
Operate
PFI/PPP Project Structure
Public Sector Provider
Financial Institution
Design
Team
+ Professional
Advisers
Special Purpose
Vehicle (SPV)
Equity
Contractor(s)
(CJV)
FM Provider(s)
Subcontractors
Subcontractors
PFI/PPP Project Structure
Public Sector Provider
Financial Institution
Design
Team
+ Professional
Advisers
Special Purpose
Vehicle (SPV)
Equity
Contractor(s)
(CJV)
FM Provider(s)
Subcontractors
Subcontractors
Interface
PFI/PPP Project Structure
Public Sector Provider
Financial Institution
Design
Team
+ Professional
Advisers
Special Purpose
Vehicle (SPV)
FM
Equity
Contractor(s)
(CJV)
FM Provider(s)
Subcontractors
Subcontractors
FM Role – Public Sector Provider
• Technical Advisor as part of PFI/PPP Project Management team
•
/ Architect / QS
– Sector specific strategic asset management advice
– Whole Life Cycle Costing
– Develop FM output specification
– Evaluate private sector FM bids and contract negotiation
– TUPE / ROE advice
– Bringing knowledge of how the private sector will approach
the pricing of a PFI bid
– Helping the Public Sector to present the project in an
attractive way which is most likely to deliver value for money
from bidders
Existing Hard / Soft FM provider
– Potential ongoing service delivery role (dependant on
contract scope i.e. Hard v Soft)
– ‘Local’ knowledge is key
PFI/PPP Project Structure
Public Sector Provider
Financial Institution
Design
Team
+ Professional
Advisers
Special Purpose
Vehicle (SPV)
FM
Equity
Contractor(s)
(CJV)
FM Provider(s)
Subcontractors
Subcontractors
FM Role – SPV
• FM bid management/strategy
• Review of FM proposals and market testing of supply
•
•
•
•
•
chain / budgets
Independent certification of FM services at
Completion
Training of Management staff
IT System support
Risk management
Develop whole life strategy and manage Life Cycle
Fund (dependant on risk transfer – see later)
PFI/PPP Project Structure
Public Sector Provider
Financial Institution
Design
Team
+ Professional
Advisers
Special Purpose
Vehicle (SPV)
Equity
Contractor(s)
(CJV)
FM Provider(s)
Subcontractors
Subcontractors
FM
FM Role – FM main contractor
• Hard FM (Health - typically £20-30 / m2 pa)
•
– Planned and reactive maintenance
– Grounds maintenance
– Window cleaning
– Pest Control
– Waste
Soft FM (Health - typically £80 - 100 / m2 pa)
– FM management (£10-15 / m2 pa or part of service budgets)
– Catering (£15-20 / m2 pa)
– Cleaning / Domestics (£18-25 / m2 pa
– Laundry (£8-12 / m2 pa or £0.30 – 0.35 per item)
– Helpdesk / Reception (£1.50 – 1.75 / m2 pa)
– Portering (£10-12 / m2 pa)
– Receipt & Distribution
– Security
– Car parking
– Transport etc.
PFI/PPP Project Structure
Public Sector Provider
Financial Institution
Design
Team
+ Professional
Advisers
Special Purpose
Vehicle (SPV)
Equity
Contractor(s)
(CJV)
FM Provider(s)
Subcontractors
Subcontractors
FM
FM Role – FM sub-contractor
• Hard FM / Soft FM delivery
• Issues:
–
–
–
–
–
–
–
Ability to take performance risk from main contractor
Strength of balance sheet
Track record and sector expertise
Knowledge of TUPE / ROE legislation implications
Ability to enter long term contract – typically 10 yr +
Local knowledge
Specialist services
PFI/PPP Project Structure
FM
Public Sector Provider
Financial Institution
Design
Team
+ Professional
Advisers
Special Purpose
Vehicle (SPV)
Equity
Contractor(s)
(CJV)
FM Provider(s)
Subcontractors
Subcontractors
FM Role – Financial Institutions
• Technical Due Diligence on Hard FM / Soft FM delivery
• Issues:
– Review of “operational risk”
– Is the output specification industry standard /
onerous / likely to cause performance?
– Are the FM providers method statements /
methodology / staffing structure robust and
deliverable?
– Are the service budgets and cost estimates
adequate to deliver a compliant service?
The FM Role in PFI/PPP
• PFI is about providing a facility then operating &
•
•
•
•
•
maintaining it for a 25-30 year concession period
Almost all PFI bidding consortia include an FM provider
The FM provider is involved in the project from the start
The 25-30 year FM costs must be accurately predicted
and will be fixed during the bid stages
PFI is about achieving VFM throughout the concession
period not just in terms of capital costs
FM will therefore have a major input into the design
process
How FM Providers Add Value to PFI Bids
• Engaging with the contractor and design team
• Involvement in design team meetings & value management
•
•
•
•
•
•
workshops
Design life and service life input
Review of detailed design & specification decisions
Supply chain management
Encouraging trade-offs, i.e. increasing capital spend in order to
achieve long term cost savings
Ensuring adequate provision is made for future maintenance
Real feedback from operation
Increasingly, due to whole life costs, FM is
taking a leading role in the design process
The importance of whole life
thinking
Importance of Whole Life Thinking
• Whole life thinking is central to PFI process
• Achieving best value over the life of the
•
•
•
•
•
•
concession
Optimising capital and operating costs
Procuring durable, maintainable, efficient
facilities
Integrating design,construction & FM
Planning for future expenditure
Managing future risks
Sustainable solutions
Importance of Whole Life Thinking
Construction
Design
Maintenance
Whole Life
Costing
Environment
Legislation
Operations
Long Term Commitment
Daily
Weekly
Monthly
1 year
5 years
15 years
25 - 30 years
Whole life approach to design, construction and operation with ‘spend to save’ options for constant improvement
Major replacements planned in advance with emphasis on continuity and non-disruptive work activities
Cyclical replacements and refurbishments to maintain quality, functionality and service
Annual plans developed in advance through discussion with end users
Monthly review meetings and forecast planning
Weekly Performance review
Daily monitoring
“A whole life approach is underpinned by
medium and short term activity integrated
with an overall objective for continuous,
high-quality service delivery”
(source: HBG FM)
At the Feasibility/Concept stages
• Size & orientation of buildings
• Estates strategy – refurbish v newbuild
• Energy use
– Shape of building (ratio of exterior wall to
enclosed area, prevailing weather direction, solar
gain – some conflict)
– Numbers of staff required to maintain and operate,
security, plant etc. (Can numbers be reduced?)
– Height of building (need for lifts, scaffolding,
window cleaning versus reduction in external
envelope area)
At the Detailed Design Stage
• Analysis of ‘spend to save’ options
• Net Present Value calculations - e.g. for floor finishes
or roof finishes
•
•
•
•
•
Cost smoothing to reflect income streams
Risk modelling
Capital allowances & taxation issues
Energy modelling
Benchmarking of FM costs
During the 30 Year Concession Period
• Logical grouping of related work items, e.g. to optimise
•
•
•
use of scaffolding & to reduce downtime
Consideration of what drives replacement, e.g. physical,
economic, technical obsolescence.
Liaison with the financial modelers to agree the optimum
spend profiles.
Smoothing of life cycle spend to avoid major peaks &
achieve maximum financial advantage, e.g.:
– Internal redecorations profiled as 20% per year rather
than 100% every 5 years
– Flooring renewals to be profiled according to likely
wear & damage
WLC Approaches (1): Historic costs
•
•
•
•
•
Based on analysis of similar facilities in use, eg:
– £/m2 /year
– £/occupant/year
– £WLC as a % of capital cost
Useful in providing quick, broad estimates
Cost build up not always explicit
Can lack robustness
Unlikely to be suitable as a cost
optimisation tool
WLC Approaches (2): Predictive
• Based on prediction rather than historic costs
• For each building element/component/location:
•
•
•
– what maintenance/replacement needed?
– when/how often?
– how much of it?
– at what cost?
Derived from condition survey of existing assets, or cost
plans for proposed works
Costs can be interrogated and optimised
A long term strategic planning tool
Typical life cycle spend profile
LIFE CYCLE EXPENDITURE
70,000,000
12,000,000
ANNUAL VALUE, £
50,000,000
8,000,000
40,000,000
6,000,000
30,000,000
4,000,000
20,000,000
2,000,000
10,000,000
0
0
1
2
3
4 5
6 7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38
YEAR
Annual Value, £
Cumulative Value, £
CUMULATIVE VALUE, £
60,000,000
10,000,000
Cost Significant – Whole Life
Rank
3 Block New Build Acute Hospital
Location
Element
Component
1 3A
2 5H
Main Building
Main Building
Wall Finishes
General Lighting
195,170,186
5,302,303
4,965,780
115,999,571
14,820,166
12,685,830
23.32
2.98
2.55
12.78%
10.94%
280%
255%
3 2H
4 5J
5 4A
Main Building
Main Building
Main Building
Internal Doors
Lift
Fittings and Furnishings
8,914,442
10,260,000
13,811,638
11,908,960
9,829,016
7,817,990
2.39
1.98
1.57
10.27%
8.47%
6.74%
134%
96%
57%
6 5M
Main Building
Services Medical Equipment
3,905,866
4,989,060
1.00
4.30%
128%
7 5L
Main Building
Fire detection and alarm
9,103,930
4,915,759
0.99
4.24%
54%
8 5L
Main Building
3,573,706
4,519,137
0.91
3.90%
126%
9 3B
10 5F
Main Building
Main Building
Staff paging and Nurse call
system
Floor Finishes
Chiller plant
10,127,624
1,655,260
4,281,284
4,228,610
0.86
0.85
3.69%
3.65%
42%
255%
11 2E
12 5H
Main Building
Main Building
External walls
Emergency lighting
17,770,390
496,578
3,605,637
3,468,101
0.72
0.70
3.11%
2.99%
20%
698%
13 5H
Main Building
General LV power
3,257,331
3,120,502
0.63
2.69%
96%
14 2G
Main Building
Internal partitions
11,967,490
2,952,802
0.59
2.55%
25%
15 5M
Main Building
Building Automation
2,352,550
2,410,239
0.48
2.08%
102%
16 3C
17 5F
Main Building
Main Building
Ceiling Finishes
General supply and extract
6,952,512
3,204,851
2,255,675
2,085,047
0.45
0.42
1.94%
1.80%
32%
65%
18 5F
Main Building
LTHWH
9,448,794
1,595,612
0.32
1.38%
17%
19 5H
Main Building
1,654,408
1,406,343
0.28
1.21%
85%
£/m2 pa
20 5L
Main Building
Uninterrupted Power
supplies
Radio, TV and CCTV
347,605
1,395,441
0.28
1.20%
401%
13.04
Sort
Code
3A - WALL FINISHES
5H - ELECTRICAL
INSTALLATIONS
2H - INTERNAL DOORS
5J - LIFT INSTALLATIONS
4A - FITTINGS AND
FURNISHINGS
5B - MECHANICAL
INSTALLATIONS
5H - ELECTRICAL
INSTALLATIONS
5H - ELECTRICAL
INSTALLATIONS
3B - FLOOR FINISHES
5B - MECHANICAL
INSTALLATIONS
2E - EXTERNAL WALLS
5H - ELECTRICAL
INSTALLATIONS
5H - ELECTRICAL
INSTALLATIONS
2G - INTERNAL WALLS
AND PARTITIONS
5B - MECHANICAL
INSTALLATIONS
3C - CEILING FINISHES
5B - MECHANICAL
INSTALLATIONS
5B - MECHANICAL
INSTALLATIONS
5H - ELECTRICAL
INSTALLATIONS
5H - ELECTRICAL
INSTALLATIONS
142,141 m2
CAPEX (replaced
elements only)
LCC
LCC £/m2
% LCC
% of Capex
replaced
£/m2 pa
16.08
68.96%
55.93%
Roofing Product Analysis
Roof Options WLC 30 Years (NPV @ 3.5 - 4,000m2 Building)
Polymer modified felt
Element
Standing seam polymer coated/colour coated
Standing seam mill finish
Single Ply membrane
Composite Tiles
Concrete Tiles
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
£
B
MATERIAL
C
Selection needed for
Planning Permission
9
10 Roof Covering
D
Priority
E
Capex
F
Ratio
G
Ranking
H
30Y WLC
I
30Y Capex
+ WLC
J
Ratio
K
Ranking
L
30Y WLC
M
30Y Capex
+ WLC
N
Ratio
O
Ranking
Concrete Tiles
Y
Y
1
14,192
1.08
2
6,594
20,786
1.00
1
3,142
17,335
1.00
1
Composite Tiles
Y
1
24,835
1.90
5
8,804
33,640
1.62
5
4,196
29,031
1.67
6
Y
Y
1
1
26,163
23,546
2.00
1.80
6
3
4,584
6,548
30,746
30,094
1.48
1.45
3
2
2,354
4,014
28,516
27,561
1.65
1.59
4
3
Y
1
23,423
1.79
4
9,619
33,042
1.59
4
5,785
29,209
1.68
5
Y
1
13,081
1.00
1
22,820
35,901
1.73
6
11,704
24,785
1.43
2
11
12
13 Single Ply membrane
Standing seam mill finish
14
Standing
seam
15 coated/colour coated
16 Polymer modified felt
polymer
Managing FM Risk
• Sensitivity analysis: discount rates, inflation, labour
•
•
•
•
costs, benchmarking
Risk simulation to model variability e.g. component
replacement times & maintenance needs
Factoring in the effects of disruption
Transferring risk to suppliers/insurers
Dealing with risk in the FM cost model:
– Apply global risk premium
– Payment mechanism deduction modelling
– Reduce life of key components
– Assess consequences of failure
Summary
• “Two key processes in PFI/PPP projects: construction
and on-going management – what is the role of FM in
each?”
• PFI/PPP is and will continue to be a major market for
•
•
•
•
FM
FM has a role with many PFI/PPP organisations on
both public and private sector sides
The FM input starts before construction – most value
gained at the design stage
On-going management presents real risk and
opportunities to business and individuals
A “Whole Life” approach is key to success