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Masthead Local Govt - Procurement and Contracts

Bringing PFI projects back in-house

Projects portrait1Rob Hann, who led the 4ps/Local Partnerships legal team throughout the PFI programme in local government, takes a look at Labour’s recent pledge that it will bring PFI contracts back in house if it gets into power.

The Private Finance Initiative (‘PFI’) has always attracted controversy across the political divide ever since it was first introduced to the public sector by the John Major led Conservative Government in 1992. Even now, seven years after the last local authority PFI deal was signed, the PFI is once again attracting headlines.

Shadow Chancellor John McDonnell MP, in his key note speech to delegates at the recent Labour party conference in Brighton, made a pledge “to bring billions of pounds’ worth of PFI projects back under government control”. Mr McDonnell received a standing ovation after describing the PFI as a “scandal resulting in huge long-term costs for taxpayers whilst handing out enormous profits to some companies.”

But why does this major investment programme, which was all the rage between 1997 and 2010 under successive Labour-led administrations during the Blair/Brown years (somewhat ironically given where the criticism has come from), still attract such opprobrium all these years later? And is such wide-sweeping criticism of all PFI projects valid?

Certainly, mistakes were made with some PFI contracts; In Manchester, for example, the GM waste disposal authority has reportedly taken steps to trigger early termination of its huge waste PFI contract with Viridor as it seeks to find efficiency savings in times of austerity.

But is is it right to tar the whole PFI programme with the same sticky brush and to seek to bring all such contracts ‘in-house’? To adopt this approach wholesale is (in my respectful view) unnecessary, unaffordable and will, to boot, be likely to generate a war of attrition with the equity holders and financial community.

When PFI was first introduced into local government in 1995/96 local authorities were already lagging behind many other parts of the public sector where the PFI had been introduced in 1992. Local government had been regarded as ‘too difficult’ given the diverse nature of its functions, the comparatively lower value of projects and the complex myriad of laws and regulations. All of which tended to be a disincentive to investors considering doing business on a long-term basis with local authorities. The organisation I joined from local government in 1996, the 4ps (or Public Private Partnership Programme) was established by the Local Government Association specifically to address those problems and remove obstacles to long-term contracts and investment, and in the process, release central government PFI funding for which local authorities could bid.

Back then, in the mid-1990s, there were no local authority PFI schemes in existence, no standardisation of PFI contracts (SOPC), no proper process for determining which schemes should receive PFI financial support from central government and a wealth of legal, vires, financial, sector specific and other problems to resolve to make long-term contracts a possibility for local authorities and their private sector counterparts. The first task I had to address was to find a way to deal with the concerns over local government vires, which had severely put off banks and other funding institutions from doing business with local authorities.

The (then) New Labour Government under Tony Blair moved quickly to remove such barriers. The Local Government (Contracts) Act 1997 proved to be the answer to vires concerns about long term contracts. Many other reforms followed, but the core intention of the PFI was to engage the private sector in the design, build, finance and operation of public infrastructure, with the aim of delivering good quality and well-maintained assets that provided value for money for the taxpayer.

The PFI was adopted across a broad range of sectors with varying degrees of success and engagement by diverse public bodies. HM Treasury, to this day, provides a helpful tracker of PFI deals signed which reports that over 700 PFI projects reached financial close, securing private sector investment of around £55bn.

The PFI therefore succeeded in its main aim of delivering hundreds of new schools, thousands of new homes, fire stations and other blue light facilities, roads, bridges and other transport links. It also, incidently, funded the first route of the fast, modern tram system which serves my home city of Nottingham. Looking more widely, many waste infrastructure projects were developed through PFI to meet recycling and landfill diversion targets; in the health sector hospitals, health facilities and joint service centres were constructed to focus service delivery by diverse providers.

Without the PFI programme and the deal flow that it created, it is highly unlikely that these facilities would ever have been built.

In the case of local government, the PFI came with the added incentive of central government funding (known as PFI credits or PFI grant) which local authorities had to bid for in competition to receive up to 70% of the costs involved. Several authorities went back again and again for such funding which provided (and still provides) a ring-fenced budget to meet such costs for the duration of the contract term. The vast majority of these serviced facilities are being properly maintained and will continue to be for the contract term. Local authorities also have the right to withhold payments if services are not delivered appropriately.

In short, where PFI contracts have been properly managed (NB see below) there has been genuine risk transfer to the private sector.

Whilst the Shadow Chancellor now calls for a thorough review of existing PFI contracts, many individual local authorities, in fact, have already undertaken such reviews and many have found ways of renegotiating major contracts to meet new priorities during times of austerity through sensible dialogue and/or through use of contract review mechanisms common to all local government PFI contracts. I have helped many local authorities to use contractual triggers and options contained in standard form PFI contracts to secure savings and efficiencies from operational contracts.

As mentioned above, the PFI was always controversial. Projects signed in the early years of the PFI were largely test beds for later PFI’s which were able to build in greater contractual flexibilities and freedoms than earlier schemes. In local government, the introduction of SOPC (standardisation of PFI projects), together with the standard form change protocol, helped to greatly facilitate better, more effective and efficient change in PFIs.

Even though funding for new PFI projects was terminated in 2010 when the Coalition Government came to power, the then Government recognised that the PFI had exhibited ‘many strengths’. These included the private sector’s project management skills, innovation and risk management expertise, such as ensuring buildings are delivered to a high quality, on time and budget and that assets were maintained to a high standard throughout their lives.

However, no-one can doubt that PFI contracts are complex transactions involving a heavy-weight of conditions. At the heart of the contract approach rests the ability to control the quality of the service being delivered through the contract payment mechanism i.e. through payment deductions if services fall below contractually defined thresholds.

This feature of all PFI contracts though, requires a significant and thorough understanding of what was agreed in each individual PFI deal and how such agreement is to be interpreted in practice.

Here, I believe, lies a problem that continues to bedevil not only PFI but many other types of long term complex arrangements – namely the ability of public bodies to effectively and efficiently manage complex contracts.

Whilst organisations like 4ps/Local Partnerships, building schools for the future, PUK etc all gave some level of support at the front end of the PFI procurement process, there was no such free support provided or available to help individual authorities with either the transitional problems or to manage contracts over their long life span. No central body had the remit or budget to provide such support.

Once the procurement had finished and the contract had been signed, it was a common and oft repeated theme, that the experienced senior internal and external people who negotiated the deal moved onto the next project (or else were not engaged in managing or ensuring the delivery of the value for money promised in the business cases underlying such deals). There was no central training provided for local authority PFI contract managers. Local authorities (in common with every other sector) were pretty much left to their own devices to get to grips with their respective PFI contract bibles. That remains the case to this day.

The sufficiency of contract management support varies greatly from one local authority to another. Large authorities perhaps have greater resources and might invest time and effort for good contract management, appropriate career paths for individuals and training. Unfortunately, whereas large contractors employ expert contract negotiators, managers and lawyers, local authorities often rely on part-time support from finance and mid-grade managers with little or no experience of PFI. Staff turnover can also result in successors having little knowledge of what has been agreed or indeed the necessary skills or time to manage the complexities of such contracts. Even getting day-to-day access to the contract and associated schedules, tables and appendices can sometimes prove difficult if these remain in hard copy form in the legal departments deed safe.

So rather than ‘bring all PFI’s back in house’ as John McDonnell suggests, another less radical but potentially much less expensive solution might be to support the public sector with better contract management approaches - to help drive efficiency out of remaining term of PFI contracts. One way of doing that might be through the increased use of technology to manage the associated business processes involved in such contracts.

Some PFI projects in the health and transport sectors are already adopting these approaches to impressive effect. In a follow-up article I will outline some of the challenges involved in effectively managing complex contracts, what options and flexibilities are contained in standardised PFI contracts to drive out VFM and how technology can provide much needed assistance to cash-strapped local authorities needing help with PFI contracts or, indeed, any other major contracts.

Rob Hann is a solicitor, local government consultant and author of Local Authority Companies and Partnerships (LACAP) and a range of other books on local government law and procurement; He was director, legal services at 4ps/LP between 1996 and 2016 and helped deliver numerous local authority PFI projects; Contact Rob on 07768 906391 or This email address is being protected from spambots. You need JavaScript enabled to view it.if you have an issue with a PFI contract or need help more generally with major projects or contract management.

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