Introduction. Evaluating Value for Money. Hans de Kievit Senior PPP Consultant. Projects: Auditing Public Private Partnerships; the work continues

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1 Evaluating Value for Money Auditing Public Private Partnerships; the work continues Seminar for Supreme Audit Institutions 26 and 27 November 2012 The Hague, The Netherlands Introduction Hans de Kievit Senior PPP Consultant Projects: 2nd Coentunnel A15 Maasvlakte-Vaanplein A12 Utrecht-Veenendaal N33 Assen-Zuidbroek Schiphol-Amsterdam-Almere corridor 2 Seminar Auditing PPP

2 The Directorate-General for Public Works and Water Management (/RWS) is the executive branche of the Ministry of Infrastructure and The Environment (I&M). Under the command of a departmental Minister and State Secretary, it constructs, manages, develops and maintains the Netherlands main infrastructure networks. Ministry policy implementation Inspectorates supervision 3 Seminar Auditing PPP in a nutshell Founded in 1798 Around 9,000 employees 240 locations throughout the entire country 10 regional departments and 5 specialised departments, 35 districts, 3 project departments Annual budget: 4 to 5 billion euros 4 Seminar Auditing PPP

3 Should you use PPP or not for public sector capital investment projects? Yes No 5 Seminar Auditing PPP Policy Within ministry PPP will only be used if there is value for money Use of PPP should make the projects: Cheaper Faster Better 6 Seminar Auditing PPP

4 Introducing DBFM Auditing Public Private Partnerships; the work continues Seminar for Supreme Audit Institutions 26 and 27 November 2012 The Hague, The Netherlands The DBFM-contract DBFM is an integrated contract by which (risks of) design, build, finance and maintenance are transferred to a private consortium. By means of a DBFM-contract, risks are allocated to parties which can control and manage them at a premium level. 8 Seminar Auditing PPP

5 The DBFM-contract With DBFM buys an integral performance instead of products from Product highway 2x5 lanes to Performance (obstacle free) highway with flow speed that averages 100 km/hr 9 Seminar Auditing PPP Which integral performance? Mobility Availability 10 Seminar Auditing PPP

6 Availability = Technical availability Technical availability is specified in the Output Specifications. It contains subjects as: Roughness of the road surface Intensity of light in a tunnel If there is traffic on the road, the road might still be unavailable! 11 Seminar Auditing PPP Payment mechanism - Conventional 12 Seminar Auditing PPP

7 Payment mechanism - DBFM 13 Seminar Auditing PPP Payment for performance Gross availability fee Availability discount Performance discount Payment for performance If the road isn t available during contractual agreed time periods the contractor receives a discount Discount based on quality level and user-safety, not availability 14 Seminar Auditing PPP

8 Value for money Auditing Public Private Partnerships; the work continues Seminar for Supreme Audit Institutions 26 and 27 November 2012 The Hague, The Netherlands Value for money Financial benefits Off balance finance Cheaper? Non-financial benefits Accelerated delivery Enhanced delivery 16 Seminar Auditing PPP

9 Non-financial benefits Accelerated delivery Better on-time construction performance Earlier delivery of a planned investment programme Enhanced delivery Lifecycle approach High service quality 17 Seminar Auditing PPP Value for money testing Auditing Public Private Partnerships; the work continues Seminar for Supreme Audit Institutions 26 and 27 November 2012 The Hague, The Netherlands

10 Value for money tests Market scan In the early stages of the project, look for potential value for money (in real money or in time or in quality) in the approach to the market. Public Private Comparator After deciding the best contract options, compare them: PPP or conventional. Public Sector Comparator During the tender process, compare the offers of the private parties (PPP contract) to the public budget. 19 Seminar Auditing PPP Overview of the Value for money tests Market Scan PPC Public private comparator PSC Public sector comparator Checking the opportunity for PPP in the first phase Comparator between: - public assumption of costs - private assumption of costs Comparator between: - public assumption of costs - private best offer 20 Seminar Auditing PPP

11 Public Private Comparator First financial comparison between public and private approach of the project Costs, benefits and risks During the project s lifecycle Before the preparation of the contract starts For every project in the MIRT - Multiyear Programme for Infrastructure, Spatial Planning and Transport > 60 million 21 Seminar Auditing PPP PPC - Setting the scene Conventional procurement Public approach: Realisation: Design and build Maintenance: Daily maintenance: Performance-based contract Major maintenance: Engineering and construct PPP Private approach: Design, build, Finance and maintain 22 Seminar Auditing PPP

12 PPC - What do we compare? Public approach: 1 D&B + 9 M Private approach: 1 DBFM 23 Seminar Auditing PPP PPC - Process 1. Scope description and basic principles. 2. Qualitative comparison Determine the differences between the two approaches 3. Quantitative analysis Cost estimate of public approach Quantify the differences 4. Calculation of the result by the net present value method 24 Seminar Auditing PPP

13 PPC - Qualitative comparison - Some Examples Preparation phase: DBFM requires more specific skills in the preparation phase Financial and legal expertise Maintenance expertise Tender phase Financing the project costs money Fee s for the banks to get the loan 25 Seminar Auditing PPP PPC Quantitative analysis Starting point: Public assumption of costs Costs for realisation, daily maintenance and major maintenance Plotted over time Quantify the differences Costs of the differences Plotted over time Calculation of the results Net present value Outcome is a percentage: In this project there is..% value for money for DBFM. 26 Seminar Auditing PPP

14 Public Sector Comparator Comparison tool to determine whether a PPP approach is more advantageous then a public approach The Public Sector Comparator is used to: Gain insight into the total contract life cycle Compare the private offers Determine the value for money 27 Seminar Auditing PPP PSC - Process 1. Scope description and basic principles. 2. Rough PSC Determine the costs and benefits Indexing Public discount rate 3. Risk analysis 4. Calculation of the results by the net present value method 28 Seminar Auditing PPP

15 PSC Indexing / Public discount rate Indexing Independent indices CBS CROW Eurostat Combination of indices Public discount rate: Used to calculate the net present value Base rate Increased for risks 29 Seminar Auditing PPP PSC - Risk analysis Sorts of risks: Exogenously Out of the scope of the project Endogenously Whitin the scope of the project Spread risks Spread in quantities and prices Pure risks Unexpected occurrences Appointed risks Risks included in the risk overview Unappointed risks Risks not included in the risk overview 30 Seminar Auditing PPP

16 0,020 0,018 0,016 0,013 0,011 0,009 0,007 0,004 0,002 0,000 Mean=854,47 50% 35% 15% Spread risks Uncertainties in the cost estimate For every quantity / percentage / price Expected value Spread: Lowest value Highest value Monte Carlo simulation Spread of total costs Skewness Distribution for TOTAAL (REËEL) incl. Risico's/E , , Seminar Auditing PPP Pure risks / Unexpected occurrences Included in the risk overview Identify Esteem Money Direct costs Time Costs of delay Allocate Risks in the DBFM-contract Contractor risk Compensation Event Delay Event 32 Seminar Auditing PPP

17 Risk-allocation in the DBFM-contract Contractor risk Risk is not described in the DBFM-Contract Risk entirely with the contractor Compensation Event Total compensation for financial loss Risk entirely with the contracting authority Delay event Compensation if there is a critical delay Compensation: Interest Daily compensation For the entire duration of the critical delay Risk is shared. Fee does not cover all costs of contractor 33 Seminar Auditing PPP Risks in the PSC Pay to contractor Estimate of risks Risk = Compensation event Risk = Delay event Risk = Contractor risk Direct costs [ ] Total financial disadvantage Incorporate in PSC [ ] Incorporate in PSC [ ] [ ] Costs of delay [ ] Daily compensation [ ] Interest [ ] Not incorporated in PSC 34 Seminar Auditing PPP

18 Affordability test (Budget test) Affordability test The available budgets are allocated based on conventional procurement Do these budgets provide sufficient cover for the payment of the integrated contract? Budget converting The available budgets are being converted to a new cash flow 35 Seminar Auditing PPP Subjects in the affordability test Available budgets Cost estimates Gearing Equity 10% Debt 90% Inflation/indexing Discount rate Payment mechanism 36 Seminar Auditing PPP

19 Comparison PPC and PSC Auditing Public Private Partnerships; the work continues Seminar for Supreme Audit Institutions 26 and 27 November 2012 The Hague, The Netherlands Comparison PPC and PSC PROJECT PPC PSC Remarks A59 10% 14% Completed within planning; in maintenance phase N31 7% 31% Completed within planning; in maintenance phase 2 nd Coentunnel 5% 21% In realisation phase A12 LuVe 4% 21% In realisation phase A15 MaVa 5% 20% In realisation phase How do you explain the differences? 38 Seminar Auditing PPP

20 Comparison PPC and PSC Public Private Comparator: Comparison between two possible methods of procurement In early stages of the project lot of assumptions lot of uncertainties Based on cost estimate of the project Public Sector Comparator: Comparison between public assumption of costs and private best offer After Financial Close risks divided between parties uncertainties managed Based on cost estimate of the contract 39 Seminar Auditing PPP Value for money tests in Western Europe Auditing Public Private Partnerships; the work continues Seminar for Supreme Audit Institutions 26 and 27 November 2012 The Hague, The Netherlands

21 Value for money tests in Western Europe Since 2009: International PPP Seminars and PPP-Expert meetings Participants: England Belgium (Flanders) France Germany The Netherlands Subjects: PPP Policy and Procedures Contract and tender procedure Value for money tests Payment mechanism and project finance 41 Seminar Auditing PPP Value for money tests in Western Europe Market Scan PPP Pretest PPC Public Private Comparator PSC Public Sector Comparator England X X X Germany X X X France (PPP) - X - France (Concession) Governmental Decision Belgium Governmental Decision New strategy based on comparison is considered The Netherlands X X X 42 Seminar Auditing PPP

22 Remarkable topics on Value for money tests Common methodology Different output due to different input Discount rates Taxation Planning laws Exchange experience Construction costs Operational and maintenance costs Modelling life cycle costs (savings) Risk transfer 43 Seminar Auditing PPP Auditing PPP s Auditing Public Private Partnerships; the work continues Seminar for Supreme Audit Institutions 26 and 27 November 2012 The Hague, The Netherlands

23 Keep distance! Hands-off at what distance?? 45 Seminar Auditing PPP System based contract control Main principles: 1.Rely on the quality management system of the contractor 2.By risk based auditing 3.By a mix of audits: System Proces Product 46 Seminar Auditing PPP

24 Quality management system of contractor Plan Contract.. Act Process Do Product.... Check Verification 47 Seminar Auditing PPP Risk based auditing Perform risk analysis Update risk analysis Evaluate measures of control Executed measures of control Identify measures of control Risk management as important tool in our project- and contractmanagement 48 Seminar Auditing PPP

25 Mix of audits (1) System audit Audit on the effectiviness of the quality management system of contractor as far as applicable on the project (plan-do-check-act) Process audit Audit on de effectiveness of the project (execution) processes (design process, construction process, inspection process, traffic management process) Product audit Audit on quality of products in order to verifiy the reliability of contractors records Not: But: Are contractors products in compliance Is the system of contractor in compliance 49 Seminar Auditing PPP Mix of audits (2) Plan Process Contract.. Act Process Do Product.... Product System Check Verification 50 Seminar Auditing PPP

26 Thank you very much for your attention Any questions? 51 Seminar Auditing PPP Colofon Hans de Kievit PPP Unit Ministry of Infrastructure and Environment Griffioenlaan 2, 3526 LA Utrecht P.O. Box , 3502 LA Utrecht The Netherlands Seminar Auditing PPP