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From PFI to PPP: Financing UK infrastructure comes full circle with innovations abroad

Born in the UK, PFI migrated to Canada, where innovation morphed it into PPP. Now the model is returning to its birthplace with lessons learned for improved procurement.

More than half (54%) of the world’s population lives in cities, according to the UN. By 2050, that figure is expected to reach 66%. In the UK, 82% of the population already lives in cities. That number will only grow as the UK population increases from the current 65 million to 75 million by 2050.[1]

The growth of cities has made them increasingly critical to a nation’s economic and environmental health. That growth and the increasing impact of climate change has also put enormous strain on the infrastructure that serves the people who live in urban areas and enables their economic vitality.

Statistics from the UK’s National Needs Assessment (NNA) illustrate the strains this growth is placing on energy, roads, transit, aviation and the environment.[2]

  • Total energy demand in Great Britain could move from its current level of around 900 TWh/year to 1200 TWh/year;
  • Direct cost of strategic road congestion, estimated at £2 billion in 2010, is anticipated to rise to £8.6 billion in 2040;
  • 26% of morning peak trains arriving to London were over capacity in 2014;
  • UK airports now exhibit delays above the European average, with Heathrow, Gatwick and Luton projected to reach capacity within the next decade; and
  • Disruption from flooding costs the UK economy £1 billion per year, with 2.44 million properties at risk of flooding from rivers and the sea, and 3 million from surface water flooding.

 

INCREASING CAPACITY AND OPTIMISING WITH TECHNOLOGY

As demands on UK infrastructure continue to rise with population growth, the NNA warns that simply building new capacity to meet the challenges is neither affordable nor advisable. Infrastructure should involve a combination of increased capacity (where necessary), optimised by technology. In other words, smart infrastructure that will make smart, connected cities.

It’s a theme taken up by Amanda Clack, RICS President (Royal Institution of Chartered Surveyors), in her article, “Does the Path to City Growth go through Smart Infrastructure?”[3]

“Cities are complex ecosystems of people, business and buildings – but it’s the infrastructure that binds them together,” she writes.

Clack sees cities of the future being connected physically through infrastructure assets, as well as collaboratively through networks and systems thinking. Connectivity within and to other critical infrastructure and urban centres will be key to addressing sustainability and future-oriented growth. Building and integrating the physical and digital infrastructure assets for successful cities of the future will require innovation on a new scale – and at an accelerated pace.

PFI GOES ABROAD – AND RETURNS AS PPP

Canada has tackled many of the same challenges in developing urban infrastructure as those currently faced within the UK. While Canada is nearly 40 times larger than the UK (10 million km² vs. UK’s 242,495 km²) it has an identical percentage of urban dwellers: 82%. And its population growth rate has consistently outpaced UK for more than two decades.

To help spur infrastructure development for a growing population in the mid 1990’s – first in healthcare, then in transportation, energy, aviation and wastewater, Canada began implementing a public-private partnership model which had UK-developed PFI concepts at its core.

Over the past 25 years, Canada has adapted the PFI model and become the world’s most prolific PPP market, with 200 deals that have reached financial close – and total agreement costs valued at CAD$110 billion.[4]

Most of the deals – 166 – have come to market since 2004. According to InfraDeals, in 2015 alone, Canada closed 28 PPP deals valued at more than CAD$15 billion. By comparison, that year UK closed 20 deals valued at just over CAD$5 billion. The snowballing deal flow in Canada has much to do with the steady evolution of innovations in the Canadian PPP market in planning, risk transfer, contractual and process standardisation, as well as inherent focus on whole life treatment of the asset.

Mark Romoff, the President and CEO of the Canadian Council for Public-Private Partnership (CCPPP), has seen the influence of and resulting innovations that are based on the early PFI model.

“The Canadian infrastructure industry was wise to take cues and learn from the best practices for public-private partnerships established in the United Kingdom and Australia. Since then, the Canadian P3 model has evolved into what is now viewed globally as a best in class approach.”

One of the major benefits of the Canadian model has been a dramatic 50% reduction in procurement time. According to the Conference Board of Canada, the average procurement time for a Canadian PPP is 17 months from RFQ issuance to financial close – half that of the UK’s average procurement time of 34 months.[5]

QUANTIFYING THE BENEFIT OF REDUCED DELAYS

Another report from the Canadian Centre for Economic Analysis – using project-level data from the CCPPP, investigates the economic impact of 200 Canadian PPPs that have reached financial close. The total agreement costs for these projects exceed CAD$110 billion.

The report quantifies the benefit of reducing delays in procurement. It finds that, taken together, a one-year delay for a typical infrastructure portfolio of $100 billion reduces its 30-year value by the equivalent of nearly 10% of the total project value.[6]

A PIONEER IN CANADA’S – AND AMERICA’S PPP MARKET

BTY has been a part of the Canadian PPP market’s evolution since 2004, and helped develop some of the best practices for the Technical Advisory and Independent Certification roles in the model. We have worked on over 170 PPP projects over the past 13 years in nearly every sector: transit, highway and bridge, justice, telecommunication, energy, healthcare, education, water and wastewater and security. Notable current projects include the largest PPP transit project in North America, the CAD $5.3 billion Eglinton Crosstown Light Rail Transit in Toronto, Ontario, and the largest superhospital PPP Centre hospitalier de l’Université de Montréal in Québec.

We have also been instrumental in the migration of Canadian PPP knowhow to the US, where BTY has worked on more than 25 PPP highway, bridge, transit, aviation, education and civic projects. Current projects include the USD$4 billion LaGuardia Airport Terminal B Redevelopment in New York City, the USD$1.59 billion University of California Merced Campus Expansion and the USD$2.3 billion I-4 Ultimate Project in Orlando, Florida.

Our expertise in advising on PPPs was recognized Q1 2017, when BTY was ranked the #1 Technical Advisor in North America, and ranked #3 globally.”[7]

Many of our professionals and major clients learned their early lessons in construction and infrastructure working in the UK, before going on to make an impact and be part of Canada’s success. They were part of the move in Canada to use the PFI model that started in the UK, and helped develop the innovations and modifications that characterise the PPP model that has been so beneficial for infrastructure delivery in Canada and the United States.

This sharing of knowledge allows us to continue building on the foundations of the UK PFI model with new and improved procurement initiatives. Our experience in using the Canadian and the U.S. PPP models has positioned BTY as a market expert, with the ability to share knowledge and lessons learned in order to help facilitate Europe in meeting its infrastructure needs.

As RICS members we understand the necessity of delivering professional services of the highest standard. Now we are looking at the UK again to continue pushing this momentum of building better places, transit, communication, water and energy infrastructure.

To support existing and new clients, we have expanded our presence to London, Dublin and Belfast. We welcome enquiries from private capital, financial institutions, public authorities and owners.

 

Sources:

[1] Infrastructure Transition Research Consortium (ITRC)
[2] National Needs Assessment: A Vision for UK Infrastructure
[3] Amanda Clack, “Does the Path to City Growth go through Smart Infrastructure?”
[4] CCPPP, “Evaluation of Canadian P3 Projects Have Missed a Significant Value”
[5] The Conference Board of Canada, “Canada as a Global Leader: Delivering Value through Public-Private Partnerships at Home and Abroad”
[6] CCPPP, “Evaluation of Canadian P3 Projects Have Missed a Significant Value”
[7] InfraDeals League Tables, Q1 2017