PPP: learning from the past

 

It is not difficult to find examples of failed public-private partnerships (PPP). From Mexico to France, and from Australia to the US there are many many examples of how PPP has failed to deliver the benefits intended. In France for example the trend to use PPP simply to keep expenditure off the public balance sheet has led to some disastrous projects and highway projects in the Americas have become roads to bankruptcy.

However it is not always a disaster and it doesn’t have to be.  Involving private finance in infrastructure from the very early days can bring a number of benefits and ensure that public projects are delivered in a timely and effective way. Sometimes it is the only way that projects can be delivered at all. But it is crucial that private firms are held to account throughout the life of the project with contracts that demand high performance levels for the full term, and like London’s forthcoming Thames Tideway sewer tunnel, that projects are structured to ensure that the cost of capital is as low as possible. Here the consortia tendered the cost of capital at 2.49% – significantly lower than the 6-8% that might typically be required for private returns. One of the biggest criticisms of PPP is that private money costs more than public money. It doesn’t have to.

So I was pleased to be asked by The Guardian (article here) to look at examples where PPP has worked, or is working, for companies and the public sector. Governments around the world, including US President Elect Donald Trump are looking to private finance to fund much needed infrastructure. Highlighting the ways in which this has been successfully achieved might help avoid some of the contractual catastrophes of the past. Bankers will tell you that PPP works best in sectors with clear revenue streams such as energy and aviation. For roads and rail it is much more difficult to make this work.

There are exceptions of course and A contract for 65 high capacity metro trains signed in November is the largest single order of new trains in the history of the Australian state of Victoria. It is also the state’s first ever public private partnership (PPP) for manufacturing. Unlike traditional contracts where trains are purchased as a commodity manufactured in the preferred location of the supplier, this partnership with the Evolution Rail consortium will ensure that sixty percent of manufacturing will happen locally creating 1,100 much needed jobs.

Job creation is key. Like the US, Australia has battled with the decline in local production industries particularly in the automotive sector. Ford closed its plant in October 2016 and Toyota and Holden will follow in 2017 leading to thousands of job losses. Not only does the new AUS $2bn PPP demand local manufacturing, further partnerships with Toyota and other local organisations will ensure that staff from the automotive sector are transitioned into the growing rail industry.

This and many other projects are covered in The Guardian article. Thanks to all that took the time to discuss the topic: ARCADIS, Pavegen, Mott MacDonald, Washington DDoT, Skanska Infrastructure Development, La Guardia Gateway Partners, Victoria Ministry for Public Transport and Major Projects and the IFC.

 

 

 

 

 

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Retrofit for the Future

The latest NCE Future Cities report (- read it here) is out and the most important topic that it covers is without doubt building retrofit. More and more buildings are being upgraded, reducing cost and energy use – but take up is generally slow.

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According to the Intergovernmental Panel on Climate Change (IPCC) buildings are responsible for 40% of global energy use and around a third of global CO2 emissions, but in high density cities this is much higher.  New York for example estimates that 75% of all emissions are generated in buildings and London closer to 80%. Against this backdrop cities are working towards a range of carbon reduction targets, the largest of which is set out in the Climate Change Act of 2008 and requires an 80% reduction in overall emissions by 2050 against 1990 values.

In response to this some global cities are taking a leading position and their actions are having an important effect worldwide. The world’s most famous office block for example, the Empire State Building is coming to the end of a $13.2m energy retrofit programme that is set to pay back the capital investment in just over three years. Two years on from the commencement of the EPC contract and the building is outperforming expectations by 5 per cent in the first year and 4 per cent in the second. Perhaps more importantly though it has also met its original goal of producing a replicable model having made all of its data openly available. As a result around 100 buildings in the US are thought to be using the methodology. For other cities it has had a more inspirational effect with the Right Honorable Lord Mayor of Melbourne Robert Doyle telling NCE that this was the inspiration for its project to retrofit 1200 buildings with energy efficiency measures. To do this the city has created a unique funding model with private banks. So far 200 retrofit schemes are underway. The benefits have surpassed all expectations with a AUS$10bn boost to GDP and an additional 50,000 jobs created in construction, smart building, retrofitting, technical services and real estate . “We are having a mini boom in our city,” says Doyle. 

So what about the UK? Consultants and contractors tell NCE that to date retrofit work is mainly driven by large businesses and public buildings. “For me the green retrofit market has not moved as quickly as we thought it would,” says Paul Chandler executive vice president of Skanska UK. Skanska also features in the Future Cities report thanks to its leading position on green contracting.

There are many reasons for the slow take up on the commercial side not least a controversial decision by the Treasury in September 2011 to throw out proposals to make Display Energy Certificates (DECs), which are mandatory in public buildings, compulsory for the commercial sector too. Instead government is insisting that all building landlords have a minimum standard Energy Performance Certificate (EPC) rating of F by 2018, but experts say this does not go far enough. 

Without any requirements to report actual consumption many landlords are lacking motivation to invest, particularly given the troubled times that have beset the property sector in the wake of the recession.  Energy costs are often low down in the hierarchy of spending requirements.

Despite these stumbling blocks there is some good work being done in the UK. “We often see energy upgrades being carried out as part of a wider retrofit programme,” says Dr Paul Toyne, director of sustainability at Balfour Beatty. He points to a number of recent UK retrofit schemes as being important examples of what can be achieved. At Blackfriars station in London for example Balfour Beatty have fitted 6000m2 of solar panels to the roof generating half of the stations energy requirements and reducing carbon emissions by 511t per year.

The full article appears in NCE Future Cities November 2013