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Public Private Partnerships

NON-PROFIT DISTRIBUTING PUBLIC PRIVATE PARTNERSHIPS

Contents:

Scope

Key Points

Background

Selection

Project Management

Accounting

Further Advice

Scope

1. This section gives guidance on the selection, management and accounting of investment projects which are to be financed and procured by means of the non-profit distributing public private partnership model (NPD). The guidance is aimed specifically at the constituent parts of the Scottish Administration and bodies sponsored by the Scottish Government (SG).

Key Points

2. NPD should only be pursued where it is likely to deliver better value for money than conventional procurement.

3. All proposed major investment projects should be considered for NPD but expert advice should be sought on a case by case basis in order to avoid the undertaking of unnecessary work on projects which from the outset would clearly be unsuitable.

4. The procedures which should be followed in a NPD procurement are very similar to those for a conventional major investment project. Applicable guidance in respect of Value for Money assessment of projects that are procured under NPD is available on the SG's Infrastructure Investment website. Further advice on the suitability of projects for the NPD approach and on the procedures to be followed should be sought from the Scottish Futures Trust.

5. The external auditors should be consulted with regard to the accounting treatment of relevant projects prior to issue of the Invitation to Participate in Dialogue, or other relevant procedure, and during contract negotiations as appropriate.

Background

6. Public private partnerships (PPPs) are arrangements typified by joint working between the public and private sector. In the broadest sense, PPPs can cover all types of collaboration (including NPD) across the interface between the public and private sectors to deliver policies, services and infrastructure. It is possible in many projects to use private sector finance and management expertise to provide services and related assets which would traditionally have been financed and operated by the public sector. The basic concept is straightforward: instead of buying a road, building or other asset and then operating it itself, the public sector enters into a long-term contract with the private sector to do so. A unitary payment is made for the services and assets provided on a regular basis over the life of the contract. Appropriate risks are transferred to the private sector where it can manage them best. This reduces public sector exposure, for example to cost overruns, provides certainty over future costs and rewards operators who manage services well. The applicable assets revert back to the public sector at the end of the contract.

7. Variants on this basic approach are financially free-standing projects where the public sector enables the project to go ahead but the service charges are paid directly by those who benefit from the service, and joint ventures where some public investment is necessary to enable a project to go ahead or to secure wider benefits.

8. This approach is distinct from privatisation because the public sector retains all its current responsibilities e.g. the provision of clinical or educational services. It defines the service standards required and puts in place contractual arrangements to ensure they are delivered satisfactorily.

9. By providing opportunities for private investment, it may be possible to take projects forward which by conventional means would have taken much longer, or which in some cases would not have occurred at all. Most importantly, it enables private sector financial, commercial and creative skills to be brought to bear on the management of projects while the public sector concentrates on the output it requires in terms of services and performance. To maximise the scope and incentive for the private sector to innovate and secure efficiencies, a public body must specify only the essential outputs of a project, leaving the private sector to decide how to provide them. A well managed competition will ensure that the public sector gets the best price for the service. The Scottish Government is committed to using NPD where it will achieve value for money in the delivery of the required outcomes. For NPD, value for money will be assessed in accordance with the VfM assessment guidance published on the SG's Infrastructure Investment website. A key element in demonstrating VfM in the procurement process is the evidence of competition.

Selection

10. NPD should only be pursued where it is likely to deliver better value for money than conventional procurement. It is therefore necessary to make an indicative assessment at the outset on whether a project is suitable. This should include an option appraisal in accordance with the Green Book. The affordability, commercial viability and value for money potential should then be further tested during the development of an outline business case for the project, and this should be submitted to the Scottish Futures Trust for review before the formal commencement of a competition.

11. All proposed major investment projects, in particular major capital investment projects, should be considered for NPD but expert advice should be sought on a case by case basis in order to avoid the undertaking of unnecessary work on projects which from the outset would clearly be unsuitable. This consideration should be across investment programmes. That does not mean that all projects which are subsequently examined for their suitability for NPD should be tested on the market. The public sector should go out to competition only on well thought out proposals that could offer the prospect of good NPD projects. Approval for not pursuing NPD in relation to major investment projects should be obtained at an appropriate level and reasons documented.

12. It is generally accepted that NPD is better suited to projects with an overall cost of more than £20m. Projects with prospective capital values of between £10m to £20m should be reviewed on a case by case basis. Projects should be prepared on the basis of clear output specifications and robust business cases and should be deliverable under standardised contractual structures.

Project Management

13. The procedures which should be followed in a NPD procurement are very similar to those for a conventional major investment project - see the section on Major Investmen Projects. They include project identification and definition on the basis of an option appraisal, outline business case and competitive tendering - usually under the EU procurement regulations' competitive dialogue procedures. The differences are in the nature of the work undertaken at each stage, notably the need to focus on specification of outputs, and in the project management activity after a contract is signed. The client is likely to be less engaged in monitoring the progress of the construction of any asset concerned, but will take a close interest in overall progress towards the delivery of defined service outputs. Whereas in a conventional capital procurement the client organisation will need to put in place a team to manage an asset once it has been constructed, in a private financed scheme it will need an "intelligent customer" capability to manage the contract for the services which are provided by the project operator.

Accounting

14. From financial year 2009-10 the accounts of Scottish central government organisations, including the core Scottish Government, Executive Agencies and relevant bodies sponsored by the SG will be prepared under International Financial Reporting Standards (IFRS). HMT has interpreted IFRS within the public sector context and provided guidance in the form of a Financial Reporting Manual (FReM) based on IFRS.

15. The adoption of IFRS significantly changes the basis of accounting for PPP arrangements from a risk allocation model (based on FRS 5) to a control based model. The guidance provided is primarily based on HM Treasury's interpretation of the International Financial Reporting Interpretations Committee Interpretation 12 - "Service Concession Agreements" (IFRIC12).

16. The IFRS based FReM indicates that IFRIC12 should be applied to an arrangement when:

"To be within the scope of IFRIC 12, the service concession arrangement must contractually oblige the private sector operator to provide the services related to the infrastructure to the public on behalf of the grantor (the public sector) (IFRIC 12.3). Contracts that do not involve the transfer or creation of an infrastructure asset for the purpose of the contract fall outside the scope of IFRIC 12, as do arrangements that do not involve the delivery of services to the public."

"The private sector operator will apply IFRIC 12 to those arrangements where:

  • the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them and at what price; and
  • the grantor controls - through beneficial entitlement or otherwise - any significant residual interest in the infrastructure at the end of the term of the arrangement".

17. The reference to the private sector is due to IFRIC 12 being written from a private sector viewpoint. During the development of the IFRS based FReM it was decided that the public sector accounting would "mirror" that of the private sector, therefore, these tests are integral to the public sector accounting for arrangements that fall within the scope of IFRIC 12.

18. The flow chart at chapter 6, page 11 of the IFRS based FReM is designed to assist a public sector grantor in determining the appropriate accounting treatment of PPP arrangements. Further advice on the accounting treatment of NPD/PPP projects is available from Accountancy Services within the SG's Finance Directorate.

Further Advice

19. Further advice on the suitability of projects for the NPD approach and on the procedures to be followed should be sought from the Scottish Futures Trust.

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Page Published / Updated: June 2009