P3 (PFI) Life

February 23, 2018
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Quality, Consequences and the Construction Industrial Complex (part 138).

Following last weeks piece on Carillion, I received some interesting questions. While most people are familiar with their own part in the P3 project process, many do not understand the full life cycle.

This is my summary of the P3 project life cycle and if you are triggered, please remember, it is all IMHO. You should know I am deluded enough to aspire to be the Prof Scott Galloway (https://www.l2inc.com/speakers/scott-galloway) or John Oliver (https://www.youtube.com/user/LastWeekTonight) of the property industry.

Firstly, there are some basic presuppositions in the P3 process:

Public sector (government) are horrible at delivering capital projects on time and budget – true, IMHO.
85% of a building’s lifetime expense comes from its use as an asset – true, IMHO.
P3 is low cost and transfers risk from the public to private sector – I am calling b*!!S&!t on this one, but you have to look deep to see this is not true.
Bidding firms are vertically integrated and have the knowledge and expertise to finance, design, build (on time & budget) and maintain the building – I am calling b*!!S&!t on this based on experience.

IMHO, P3 is the usual construction “Hunger Games” play but with much larger sums of money plus dire consequences when things go wrong, there, I said it. So what happens from start to finish?

RFP Phase – Planning Design & Compliance

A government procurement organization defines a need and set of requirements e.g. build a 300 bed hospital and identify a site for development.
They hire lawyers and a planning, design (Arch & Engineering) and compliance (PDC) team to produce a design concept plus output specifications.
PDC team are retained as compliance subject matter experts during the bidding, detailed design and construction phase.
A pre-qualification process is run to qualify 3 bidders / consortia with the ability to play in the big leagues and an RFP is issued
A sum of money (last one I saw was $800,000) is allocated for each of the 2 losing bidding firms / consortia to cover their bid costs and encourage them to bid for other projects.

Bidding & Design Phase

Each qualified bidder hires lawyers and secures financing – the lawyers do not work at risk, they charge full rates (their mothers did not raise fools!).
The lending bank hires a quantity surveying firm to monitor the loan and draw down of funds. This cost is passed onto the bidder.
The bidders A&E team take the RFP concept, develop it or re-design it and optimize for build cost. They do this for free or a very, very small part of the $800,000 if they are not on the winning team!!!!!!
Qualified bidding firms spend between $2m to $3m to bid each RFP with a 1 in 3 chance of winning assuming no mischief in the award process (https://www.theglobeandmail.com/news/national/executive-who-assessed-st-michaels-project-bids-had-ties-to-winner/article26511875/).
The A&E firms think they make a difference, they do not. The Cost of borrowing is the key factor followed by how low the construction firm can push it’s supply chain costs.
Each bidder / consortia presents it’s life cycle cost model, delivery schedule and design that complies with all output specifications.
As there has been an “extensive” pre-qualification process, it is a requirement to accept the lowest compliant bid.

Design & Construction Phase

The winning team has to complete the design in double quick time to enable construction to commence immediately on financial close.
In my experience the construction is usually over budget and these costs are eaten by the bidder / consortia which leads to mischief and corner cutting.
Construction ends with everyone involved exhausted and promising to leave or “never do that again”.
The “rent roll” begins and the cash flow is used to pay loans, utility costs and run the construction business.

Operation & Disposal

The building is run for 25 years at risk by the construction firm / consortia, with only pre-agreed rent increases and inflation allowances.
Everyone lives happily ever after.
At the end of the lease period, the government resume ownership for a nominal sum.

OR

Inflation or just poor management leads to the construction firm / consortia to go bust or sell on the project.
The government have to intervene i.e. spend money, to ensure key infrastructure remains operational.

So who are the winners and Losers?

WInners

Politicians who can promise new hospitals, prisons and schools while kicking the true costs onto future generations.
Lawyers.
Quantity surveyors.
Mega construction firms.

Losers

Competition, because of project and risk size, only a few players are in the game.
A&E firms, they take huge risks for no project equity or reward premium.
SME’s due to market consolidation and concentration of talent into large firms.
Tax payers in the long run.

To be fair, the above is all done with the best of intentions. However it does not, IMHO recognize the depth of skill shortages, mismanagement and mischief in the property design and construction industry. The long term consequences of P3 are unknown, but there has recently been a hint of what might come with the collapse of Carillion.

No more from me on P3. Sweet dreams everyone.

Twitter: @BLDWhisperer