What’s the Future for PFI?
Over the past 10 years, I have witnessed many good PFI projects and some not so good but the model has been exported around the globe which is testament to its appeal and success, so I am moderately optimistic about its future.
However, the whole PFI process has over the years become skewed towards an over legalised approach as increasingly complex procurement procedures and mechanisms for the transfer of risks been developed. Therefore, for PFI to survive the future there needs to be a refocus on getting back to basics and re-evaluating the whole risk transfer process, in particularly the cost v benefit of transferring certain risks but also taking a fresh look at how the schemes are brought forward.
Design risk and the procurement process
The government are currently reviewing the way PFI works and are due to make an announcement very shortly but top of my list has to be a reform of the whole procurement process for these schemes which first via the negotiated procedure and latterly with competitive dialogue has been rife with waste and cost the public purse many millions of pounds in abortive bid costs and extensive professional fees, not to mention the cost of the infrastructure of government to support such slow and cumbersome means of procurement.
The industry has accepted the high levels of investment required to bid for these schemes, largely because they have been making good money elsewhere, but that position is likely to change as schemes become scarcer, margins tighten further and the whole industry is put under increasingly close scrutiny on their operational PFI contracts.
I have thought for some time now that one easy way to simplify and shorten the bid process surely must be for authorities to appoint their own professional teams to develop their own designs up to planning and then commence the competition process in much the same way that conventional capital projects are procured via a design and build procurement route. Historically, the reasons for not doing this in the first place was to maximise the level of risk transfer over to the private sector, link design with construction and operation and encourage innovation. In my experience though many of these virtues have been overstated and for the majority of schemes many of these virtues can still be provided with a good brief and professional team via the route advocated above.
The only possible exceptions to this approach being projects where there is a specialist operational component which is intrinsically linked to the design of the asset. In such cases, it becomes risky to break the link between design and operation. Examples of such projects include waste, some of the more complex leisure projects and energy but I’ve no doubt that when one looks carefully enough across the industry the necessary skills are available in the market to help authorities even with these more specialist projects.
Furthermore by making authorities dip into their pockets to fund the up front delivery costs should sharpen focus, demonstrate commitment and makes decision makers more accountable for bringing forward new schemes which in these uncertain times is necessary to inspire confidence. Having then progressed designs to a more advanced stage then a more balanced evaluation of the risks may be possible which in turn drives the debate over which risks can be avoided, minimised or transferred.
The partnering services provisions within the strategic partnering agreement underpinning the NHS LIFT suite provides for NHS Trust’s to buy professional services to provide such up front advice though this provision has in my experience been poorly used as the mindset has been that such responsibility for developmental costs sits with the LIFT Co.. The upshot of this has been that schemes have commenced prematurely without having fully establishing the key fundamentals such as the business case, brief, programme and affordability etc.
These experiences point to a deeply engrained culture of risk avoidance which has skewed thinking and held back change and yet I have seen a change of mood over the past 18 months and a desire to challenge conventional thinking from the underwriting of developmental costs, reviewing the need for some service level specifications and in some cases their complete removal, a review of the hard and soft facilities management provisions and in some cases their complete removal, challenging the design standards and working together to develop more efficient designs. The upshot of such discussions has been a move towards a different style of contract which was deemed to be more affordable even though many of the hard and soft facilities management responsibilities have been passed back to the Trust. The principal reason for this being that the authority still had to provide the services on their other facilities so there was little or no benefit being gained from outsourcing such services on a piecemeal basis.
One of the points from BSF and LIFT which needs to be addressed if the model is to survive is to confront the whole aspect of independence where several organisations may be subtly linked into the project pipelines either through equity stakes or the provision of developmental costs. To survive in this new world these vehicles therefore need to free themselves of such shackles if they are to robustly demonstrate they have achieved value for money through market competition rather than benchmarking.
In summary I believe that PFI will survive but only if the procurement process and the operational phases are radically changed. What is certain is that it will no longer be the only show in town and it is likely to be bypassed by a range of more flexible investment vehicles such as express LIFT, local asset based vehicles and service targeted estate partnerships which offer greater flexibility, are geared around shorter operating periods and have the necessary independence to procure projects in the manner which best suits the circumstances.
Existing operational contracts
As for operational PFI contracts the government has recently launched a pilot for the examination of the Queen’s Hospital, Romford PFI contract project to identify ways of reducing ongoing costs in this contract on behalf of the local NHS Trust. This is the first of a number of pilot reviews of large contracts – including PFI contracts – with over £100 million remaining contract value following the recommendations arising from Sir Philip Green’s Efficiency Review. The lessons will then be used to drive savings across the full portfolio of PFI contracts.
On hearing the announcement I was initially very skeptical and to a certain degree I remain skeptical as I can’t see PFI providers handing back any savings without some challenging negotiations around changes to the service level specifications and balance of risks between the authority and provider.
This though is the point isn’t it? as the government recognise that gold plating exists within many contracts and that on reflection many of the risks and responsibilities placed on the PFI providers for elements such as utility costs, indexation, vandalism, service level specifications, response times, insurances, change in law and soft FM may now either be removed entirely and the risk transferred back or services taken back by the Authority.
But how does one go about valuing some of these items and what are the legal implications?. These are the aspects where I am most skeptical. The saving offered are likely to be less than the cost originally ascribed to the element and the removal of some items may have a cascade factor onto the costs of other services within the same PFI contract or more seriously on the cost of other PFI contract. I haven’t even touched on the legal challenges.
Notwithstanding these concerns I do accept that these contracts need to be looked at both from a performance management perspective, which has historically been poor, and the structure of the contract. I do though believe that providers will act in the public interest to help identify and work through savings. However, before embarking on such a cost reduction plan, the right advisors need to be engaged on the right terms – not half a fee for half a job – and this needs to be done in collaboration. I think one needs to recognize that the providers costs should also be reimbursed so that an open and transparent dialogue can be conducted which identifies the best sources of savings, the options and their implications.
Lets also not forget that arguably one of the best way for authorities to save money is to ensure that their PFI contract are highly utilised and as much activity as possible is provided within these facilities. The utilisation of the asset therefore needs to be looked at closely and where possible this should be increased by transferring activity away from other estate so that savings may be made elsewhere.