Irfan thesis publish

409 Pages·2014·2.37 MB·English

by  Ansari Mr I

CRANFIELD UNIVERSITY

IRFAN AHMAD ANSARI

EVALUATING THE FINANCIAL ROBUSTNESS OF SPECIAL
PURPOSE VEHICLES INVOLVED IN THE DELIVERY OF
DEFENCE PRIVATE FINANCE INITIATIVES

CRANFIELD DEFENCE AND SECURITY

PhD THESIS
Academic Year 2013-14

Supervisor: Professor Ron Matthews
April 2014

“This thesis is submitted in partial fulfilment of the requirements for the Degree of PhD”

Cranfield University, 2014. All rights reserved. No part of this publication may be reproduced without
the written permission of the copyright holder
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ABSTRACT
Public sectors in the developed and emerging economies have been witnessing a period
of intense change over the past three decades as a result of the development of free-
market economy across the globe. In the UK, the public sector in 1970s (that comprised
of nationalised industries) was severely criticised for being wasteful, and subject to
political intervention, thereby making them inefficient systems for delivering public
services. To put matters right, successive governments from the late 1970s embarked on
public sector reforms. These reforms centred on increasing the role of private sector in
delivering public services. Privatisation, the implementation of accruals-based
accounting and application of compulsory competitive tendering in the public sector
were some of these reforms. Public-private partnerships, including private finance
initiatives (PFIs), introduced in the 1990s, were a continuation of these reforms. In the
defence sector, various reforms carried out prior to 1990s failed to completely remove
cost and time overruns in defence projects. PFIs were introduced to further rectify the
failures of previous reforms in the defence sector because they were purported to
provide better value for money.

Defence PFIs are long-term agreements whereby the Ministry of Defence, MoD,
contracts to purchase quality services on a long-term basis from the private sector
(through the special purpose vehicle, SPV) in which the private sector provides all the
finance required in constructing the asset that is used to provide the services. Value for
money of PFIs is about economy, efficiency and effectiveness. The question, though is
whether, Defence PFIs provide value for money as claimed by the MoD? The purpose
of this thesis is to evaluate the effectiveness of three categories: 1) accommodation, 2)
equipment and 3) training of Defence PFIs by assessing the financial robustness (over a
six-year period) of the SPVs engaged in their delivery.

This research employs a multi-method methodological approach to gather data.
Qualitative research methods were employed in exploring and understanding customer-
supplier relationships and included, PPPs, PFIs in general (and Defence PFIs in
particular), the public sector reforms that brought about private sector integration,
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defence reforms, and Defence PFI policies. Quantitative research was used to collect
and evaluate financial data on SPVs (used in Defence PFIs).

Research analysis provided mixed results regarding the financial robustness of SPVs
employed in the delivery of Defence PFIs. The profit margins of SPVs involved in the
delivery of Defence PFIs relating to the category of accommodation were the highest.
This is followed by SPVs in the category of Defence equipment and then by SPVs in
the category of Defence training. Interestingly, the majority of SPVs involved in the
delivery of Defence PFIs relating to accommodation have sound financial health. On the
other hand, most SPVs relating to the other two categories have serious financial
problems and therefore show cause for concern. Based on research findings of this
study, a number of important policy recommendations are advanced to raise the
effectiveness of PFIs in the defence sector and the wider public sector.
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ACKNOWLEDGEMENTS
First of all I would like to thank Allah, the Almighty for giving me the strength and
patience to complete this doctoral thesis. This thesis would not have been possible
without the blessing and generous support of mentors, colleagues, friends and family.
My heartfelt thanks to all of them for their enormous contributions. However, I will not
be doing justice if I do not single-out a few who have been particularly instrumental in
standing by me.

First and foremost, a big thanks to my ever so patient supervisor, Professor Ron
Matthews. He has also been my mentor and inspiration in pursuing this research. It goes
without saying that this thesis could not have been completed without his commitment,
trust and positive feedback towards my research.

My gratitude goes to Dr Sylvie Jackson, my very kind line manager who supported me
and gave me the time to complete this thesis. I am also grateful to Sandra Stonham and
Kerry Iwaniszyn for their administrative support. I would like to register my thanks to
the Barrington Library Staff for their support.

I am also indebted to my parents and siblings for their prayers and moral support,
especially my brother, Salman Ansari. Finally, I would like to thank my wife, Sabahat,
for putting up with my absence from home and for her fervent prayers and moral
support. Many hugs to my two-year old son, who was born during the completion of
this thesis, for all the times I could not be with him.
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LIST OF CONTENTS

CHAPTER ONE
PRIVATE FINANCE INITIATIVES: TRANSFORMING THE UK PUBLIC
SECTOR .............................................................................................................. 19
1.0 Genesis of UK PFIs .................................................................................................. 19
1.1 Defining PFIs ........................................................................................................... 21
1.2 PFIs: The Second Advent … .................................................................................... 22
1.3 PFIs: Global Footprint .............................................................................................. 26
1.4 PFIs: Modernising the UK Defence Sector .............................................................. 27
1.5 PFIs Drawing Fire .................................................................................................... 28
1.6 PFIs: Failing the UK’s Future? ................................................................................ 31
1.7 Study Aim................................................................................................................. 32
1.7.1 Study Objectives ........................................................................................... 32
1.7.2 Study Value .................................................................................................. 32
1.7.3 Study Methodology ...................................................................................... 34
1.8 Research: An Overarching View .............................................................................. 36
1.8.1 Research Methodology ................................................................................. 36
1.8.2 Research Philosophy .................................................................................... 37
1.8.3 Research Typology ....................................................................................... 41
1.9 Research Design ....................................................................................................... 43
1.9.1 Multi-Method Strategy ................................................................................. 43
1.9.2 Secondary Data ............................................................................................. 45
1.9.3 Financial Statements ..................................................................................... 46
1.9.4 Unqualified audit reports .............................................................................. 46
1.9.5 Research Plan ............................................................................................... 47
1.9.6 Data Access .................................................................................................. 47
1.10 Data Analysis ........................................................................................................... 48
1.10.1 Quantitative Data .......................................................................................... 48
1.11 Research Reliability ................................................................................................. 48
1.12 Research Values ....................................................................................................... 48
1.13 Research Ethics ........................................................................................................ 48
1.14 Outline Chapters ....................................................................................................... 49

CHAPTER 2
PARTNERING, PUBLIC PRIVATE PARTNERSHIPS AND PRIVATE
FINANCE INITIATIVES ...................................................................................... 57
2.0 Introduction .............................................................................................................. 57
2.1 Spectrum of Customer-Supplier Relationships ........................................................ 57
2.1.1 Adversarial Relationships ............................................................................. 59
2.1.2 Partnership Relationships ............................................................................. 61
2.2 Public and Private Sectors: Similar or Divergent? ................................................... 67
2.2.1 Public versus Private: Environmental Issues ................................................ 69
2.2.2 Public versus Private: Transactional Factors ................................................ 72
2.2.3 Public versus Private: Organisational Considerations .................................. 73
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2.3 Working Together: Partnering Between Public and Private Sectors ....................... 75
2.4 The Case for Public-Private Partnerships ................................................................. 77
2.4.1 Wider Markets Initiative ............................................................................... 80
2.4.2 Policy Partnerships ....................................................................................... 81
2.4.3 Joint Venture Partnerships ............................................................................ 83
2.4.4 Private Finance Initiative (PFI) .................................................................... 85
2.5 The PFI Principle...................................................................................................... 85
2.6 PFIs in Action ........................................................................................................... 86
2.6.1 Capital Investment: Public Sector Decision Making ..................................... 88
2.6.2 The Public Sector Comparator ..................................................................... 90
2.6.3 Project Affordability ..................................................................................... 92
2.6.4 Contract Bidding .......................................................................................... 92
2.6.5 Bid Evaluation .............................................................................................. 95
2.6.6 Creation of the SPV ...................................................................................... 95
2.6.7 Financing the PFI ......................................................................................... 96
2.6.8 Accounting for PFIs ................................................................................... 101
2.6.9 Risk Transfer .............................................................................................. 105
2.6.10 Control and Flexibility ............................................................................... 109
2.7 Scope of UK PFIs ................................................................................................... 110
2.8 Need for PFIs.......................................................................................................... 114
2.9 Value for Money Demystified ................................................................................ 114
2.10 Testing Value for Money In PFIs ........................................................................... 118
2.10.1 Economy ..................................................................................................... 120
2.10.2 Efficiency.................................................................................................... 122
2.10.3 Effectiveness ............................................................................................... 123
2.11 Assessing the Effectiveness of PFIs ....................................................................... 125
2.12 Summary ................................................................................................................ 125

CHAPTER 3
REFORMS IN THE PUBLIC SECTOR ............................................................... 141
3.0 Introduction ............................................................................................................ 141
3.1 The Nature of UK Parliamentary Democracy ........................................................ 142
3.2 Troubling Public Finance in the 1970s................................................................... 146
3.2.1 Management of Public Finance .................................................................. 147
3.3 RAB: The New Way to Account for Public Finance ............................................. 154
3.3.1 Accruals Accounting in the Private and Public Sectors ............................. 158
3.3.2 Problems with the Cash Regime ................................................................. 159
3.3.3 How RAB Addresses the Drawbacks of Cash Accounting in the Public
Sector ..................................................................................................................... 160
3.3.4 Adoption of RAB in the Public Sector ....................................................... 161
3.3.5 Is RAB Working? ....................................................................................... 161
3.4 Privatisation in the Public Sector ........................................................................... 164
3.4.1 Privatisation in Action ................................................................................ 166
3.4.2 The Privatisation Process ........................................................................... 169
3.4.3 Safeguards to Protect the Public Interest in Privatised Corporations ......... 171
3.4.4 Reaction to Privatisation ............................................................................. 172
3.4.5 Has Privatisation Worked? ......................................................................... 173
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3.4.6 Privatisation’s Impact on the Exchequer .................................................... 177
3.5 Other reforms in the Public Sector: Compulsory Competitive Tendering ............. 178
3.5.1 CCT in Action ............................................................................................ 180
3.5.2 Organisational Effects of CCT ................................................................... 181
3.5.3 Impact of CCT on Public Service Workers ................................................ 182
3.5.4 Financial Advantage of CCT ...................................................................... 185
3.6 Public-Private Partnerships .................................................................................... 187
3.7 PFIs: Furthering Commercialisation of The Public Sector .................................... 188
3.8 Defence: Widening the Scope of PFIs ................................................................... 191
3.9 Summary ................................................................................................................ 192

CHAPTER 4
PRIVATISING DEFENCE AND THE EMERGENCE OF PFIs ............................ 201
4.1 Introduction ............................................................................................................ 201
4.2 Defence: A Public or Private Good? ...................................................................... 201
4.3 Is Defence Different? ............................................................................................. 206
4.4 The Case For and Against Nationalising Defence ................................................. 207
4.5 Public-Private Mix in the Provision of Defence in Britain .................................... 213
4.6 Defence Reforms, 1960-1979................................................................................. 222
4.7 Defence Reforms: Thatcher Era ............................................................................. 227
4.8 Effects of the Thatcher Reforms ............................................................................ 233
4.9 The Rise of Defence PFIs ....................................................................................... 235
4.10 MoD’s Love Affair with PFIs ................................................................................ 238
4.11 Performance of Defence PFIs ................................................................................. 239
4.12 Summary ................................................................................................................ 242

CHAPTER 5
FINANCIAL ROBUSTNESS OF SPVs IN PFIs .................................................... 253
5.1 Introduction ............................................................................................................ 253
5.2 Financial Terminology Revisited ........................................................................... 254
5.2.1 Weak Current Assets .................................................................................. 255
5.2.2 Operating Leases and Financial Commitments .......................................... 256
5.2.3 Income Recognition .................................................................................... 258
5.3 Financial Ratios to Examine Financial Robustness of SPVs ................................. 262
5.4 Financial Robustness of Defence SPVs ................................................................. 264
5.5 Defence PFI Case Study 1: Accommodation ......................................................... 266
5.5.1 Sub-Case Study A: Project Allenby/Connaught ......................................... 267
5.5.2 Sub-Case Study B: Project Central Scotland Family Quarters................... 270
5.5.3 Sub-Case Study C: Project Colchester ....................................................... 273
5.5.4 Sub-Case Study D: Project Main Building Refurbishment ........................ 277
5.5.5 Sub-Case Study E: Project Tricomm Housing (Portsmouth) ..................... 280
5.5.6 Sub-Case Study F: Project Devonport Support Services Armada .............. 283
5.5.7 Sub-Case Study G: Project RAF Lossiemouth Family Head Quarters ...... 287
5.5.8 Sub-Case Study H: Project Wattisham Married Quarters .......................... 290
5.6 Analysis of Defence Accommodation PFIs ........................................................... 292
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5.7 Defence PFI Case Study 2: Equipment .................................................................. 294
5.7.1 Sub-Case Study A: Project C Vehicles....................................................... 294
5.7.2 Sub-Case Study B: Project Field Electrical Power Supply ........................ 297
5.7.3 Sub-Case Study C: Project Heavy Equipment Transporter ........................ 299
5.7.4 Sub-Case Study D: Project Naval Communications .................................. 302
5.7.5 Sub-Case Study E: Project Skynet 5 .......................................................... 305
5.8 Analysis of Defence Equipment PFIs .................................................................... 309
5.9 Defence PFIs Case Study 3: Training .................................................................... 312
5.9.1 Sub-Case Study A: Project Army Foundation College .............................. 312
5.9.2 Sub-Case Study B: Project Astute Class Training Services ....................... 315
5.9.3 Sub-Case Study C: Project Attack Helicopters Training ........................... 319
5.9.4 Sub-Case Study D: Project Defence Sixth Form College .......................... 322
5.9.5 Sub-Case Study E: Project Joint Services Command and Staff College .... 324
5.9.6 Sub-Case Study F: Project Hawk Simulator............................................... 327
5.9.7 Sub-Case Study G: Project Medium Support Helicopter Aircrew
Training Facility ..................................................................................................... 331
5.9.8 Sub Case Study H: Project RAF Sentry E-3D ............................................ 334
5.10 Analysing Defence Training PFIs .......................................................................... 337
5.11 Summary ................................................................................................................ 339

CHAPTER 6
CONCLUSIONS AND POLICY RECOMMENDATIONS .................................... 347
6.1 Chapter Outline ...................................................................................................... 347
6.2 Aim and Objectives of this Study........................................................................... 347
6.3 Summary ................................................................................................................ 348
6.4 Contextual Evaluation ............................................................................................ 354
6.5 Conclusions ............................................................................................................ 357
6.5.1 Defence Accommodation PFIs ................................................................... 358
6.5.2 Defence Equipment PFIs ............................................................................ 359
6.5.3 Defence Training PFIs ................................................................................ 360
6.6 Policy Recommendations ....................................................................................... 362
6.7 Areas for Further Research ..................................................................................... 365

APPENDIX A ..................................................................................................................... 369
APPENDIX B ..................................................................................................................... 377
APPENDIX C ..................................................................................................................... 381
Bibliography ........................................................................................................ 385

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