PPP CONFERENCE HONG KONG 2005 The Exclusion of Scottish Firms in - PowerPoint PPT Presentation

PPP CONFERENCE HONG KONG 2005 The Exclusion of Scottish Firms in Scotland’s PFI Projects Kirsty Hunter and Professor John Kelly Glasgow Caledonian University School of the Built and Natural Environment E-mail: khu@gcal.ac.uk

Structure of Presentation � A Background to the PFI � PFI Projects in Scotland � The Research Project � Research Methodology � Issues Identified in Interviews � Barriers to Entry � The Questionnaire � The PFI Players � PFI Supply Chain Information � Results � Problems Encountered � Conclusions & Further Work

A Background to the PFI Introduced in 1992 by Conservative Gov. � Extended by Labour Gov. – PPP’s � To increase involvement of private sector in the � delivery of public services A vehicle for large scale public sector investment � offering fastest rate of construction for public buildings Public sector uses an off balance sheet asset � Achieve vfm & transfer risk � Controversial scheme �

PFI Projects in Scotland £2.7b investment in PFI 1998-2003 (Audit Scotland, 2002) � School Building Programme 2700 primary & secondary schools � 1/3 of total investment � � Healthcare 7/11 new hospital developments since May 1999 � � Infrastructure Skye Bridge, southern M74, M77, Glasgow Southern Orbital � � Water 1500 projects from April 2002-2006, £1.8b � � Glasgow Housing Stock Transfer Spending plans for £4b in next 30years �

The Research Project Funded by the RICS � April 2004 – ongoing � Assisted by the RICS � Investigate PFI players in Scotland’s projects � � Quantity Surveyors � Architects � Contractors � Other members of the core construction team “How many architectural practices, contractors, project � management firms and other members of the typical core construction project team are based in Scotland?” Large national contractors south of border??? � “The Treasury have a record of excluding smaller firms through restrictive PFI, prime contracting and Procure 21.”

Scottish Parliament Example Core Project Organisation Location Team Architect EMBT Barcelona, Spain RMJM Scotland Construction Bovis Lend Lease London Manager (Scottish Office) Quantity DL&E London Surveyor (Scottish Office) Consulting Arup London Engineer (Scottish Office) Planning Turner & London Supervisor Townsend (Scottish Office)

Research Methodology � � Strand A – Analysis of SE Database � � Strand B – Investigation of the PFI Journal � � Strand C – Structured Interviews of Case Study Research � � Strand D – Questionnaire Survey of Construction Faculty Board Members � � Strand E – Study of Single Project

Strand C: Issues Identified in Interviews � Specialist Skills � Small number of lawyers & project managers � Involvement of council employees with non technical background � Use of local supply chain dependent on availability of skills � Fragmentation � Formation of strategic alliance / consortium � Bureaucracy & Size � Number of regulatory bodies � Large size of projects or bundled projects � Same contenders – PFI a specialised market � Provision of different PFI packages

Strand C: Issues Identified in Interviews � High Costs & Demands on Resources � High bidding / participation costs � High project values � High financial risks � Lack of credibility and contacts prevents involvement � Demands on management time � Commitment to more than one PFI - pressure on resources � Acquiring capital investment / cash flow to engage in PFI � Acquiring expensive consultancy expertise � Acquiring sub-contractors - committed to other projects

Barriers to Entry 88% contractors felt there were real barriers to the PFI (Dick & Akintoye, 1996; IPFA 2002) � Lack of appropriate skills � High participation costs � High project values � High risk � Lack of credibility and contracts � Demands on management time

Strand D: Questionnaire � Respondents were asked: � Council area they were from � PFI projects they have worked on & nature of input to projects identified � Procuring agencies / concession companies they have been involved with � To identify any other members of the supply chain

The PFI Players � Dwindling UK interest… � Treasury Review (complete – Nov 2004) � Increasing overseas interest… � Bilfinger Berger (German) � Hochtief (German) � Bouygues (French) � Overseas interest is positive because UK interest is deteriorating???

PFI Supply Chain Information � Sector i.e. education, health � Project � Sponsor / Client � Special Purpose Company (SPC) / Consortium � Contractor � Facilties Management Provider � Engineer(s) � Lenders / Debt Financing � Design � Advisors to the Consortium i.e. financial & legal � Advisors to the Client i.e. financial, legal & technical

Sources of Information � RICS questionnaire � Interviews with technical advisors � Scottish Executive PFI project fact files � National Health Service (NHS) database on projects (for health projects only)

Sector No. of No. of Percentage Projects Projects with of Projects I dentified I nformation with I nformation Health 118 82 69% Local Authority 32 16 50% Water and 9 1 11% Sewerage Scottish 5 2 40% Executive and its Agencies Further 4 3 75% Education Public Sector 3 2 67% Police 1 1 100% Total 172 107 62%

Supply Chain Member Origins Scotland, England, Overseas � Head / Main office in Scotland � Office in Scotland, Head / Main office in England or overseas � Based in England or overseas only � Global company – no particular head office (has office in Scotland)

Contractor Facilities Architect Legal Financial Technical Manager Advisor to Advisor to Advisor Client Client Balfour Beatty Gardner Keppie (4) Central Legal PWC (23) Faithful & (7) Merchant / Office (25) Gould / Atkins Sodhexo (5) (8) Roberston Roberston FM HMA/3D Dundas & Deloitte Mackenzie Group (5) (2) Holmes Wilson (10) Touche (14) Partnership (7) Partnership(3) Sir Robert ISS Mediclean Aedas (3) Shephard & Ernst Young Currie & McAlpine (4) (2) Wedderburn (6) Brown (7) (8) Morrison (4) Initial Young & Gault McGrigor Quayle Munro Canmore Healthcare (2) (2) Donald (8) (5) Partnership (7) James Walker HBG FM (2) HLM Design McClure Newchurch & Mott (4) (2) Naismith (7) Co (5) MacDonald (4) HBG (4) Dumfries Fife Council (2) MacRoberts (7) Facilities (2) Amey (2) BLB (2) Burness (7)

Results � With exception of the legal entity, the majority of profit from Scotland’s PFI is being absorbed south of the border � Based in Scotland… � 20% financial advisors � 29% facilities management providers � 33% contractors � 40% technical advisors � 43% architects � 17/37 organisations publish their profits in Scotland compared to 20 in England

Problems Encountered… � Information on Scotland’s PFI projects being readily available � Databases incomplete � Response rate in questionnaire � Few practices participating in Scottish PFI projects � Knowledge of supply chain

Conclusions & Further Work � Bidding costs & other PFI costs � Huge challenges for Scottish firms � PFI is a maturing market � ‘Two-tier’ market � With exception of the legal entity, the majority of profit from Scotland’s PFI is being absorbed south of the border � Initial premise that PFI in Scotland is undertaken mainly by organisations south of the border is disproved… � Very small constituency of firms operating in the PFI market in Scotland (Glasgow / Edinburgh based) � Current PFI system creates a ‘vicious circle’

Recommendations on Amendments to the PFI??? � Requires significant changes… � PFI and non-PFI routes � Bespoke project contracts � Different approach to risk allocation � Reserve all smaller public sector contracts for smaller companies