Many NHS Trusts benefitted from new facilities under PFI/PPP arrangements. Some Trusts are now asking whether these arrangements continue to be a benefit or have now become a burden.
Trusts, whether in financial difficulties or not, should as a matter of good practice be reviewing their PPP/PFI arrangements to assess whether any savings can be made or efficiencies found. To assist, HM Treasury has published guidance which looks at a number of areas in which savings can be found in operational PPP/PFI contracts and also introduced a voluntary code of conduct to identity and deliver efficiencies in PPP/PFI contracts.
The savings which Trusts can achieve can broadly be split into two areas, those achieved through more efficient management of the existing contract and those which are achieved through renegotiation of the contract. Areas the HM Treasury guidance suggests for renegotiation include:
- Reviewing service standards – A Trust may find services are not needed at all or at the levels specified.
- Removing/re-scoping soft or ancillary services or agreeing value testing – In some cases, it may represent better value for money to remove soft services from the contact.
- Visibility of costs and impact on profits - If the contract services are provided at costs over the market rate and there is no value testing, the provider’s profits will be enhanced. Conversely, if the services are being provided at less than the market rate, with no value testing, the Trust needs to exercise care if the provider seeks to de-scope the services or attempts to introduce value testing.
- Aligning timing of value testing exercise - Where a Trust is involved in more than one PFI, there may be scope for aligning up the value testing to save time and costs.
- Taking back provider’s share of change in law risk - Trusts have commonly shared with providers the risk of capital costs of general changes of law coming into effect during the operational phase of a contract. There may be financial benefits in the authority taking back the provider’s share of risk.
- Maximising volumes for purchasing energy - If the provider is purchasing the energy for the Trust, it may be more cost effective for the Trust to purchase the energy instead. There are also a number of steps which Trusts can take in order to reduce energy bills both in terms of energy efficiency and generation. There are also subsidies available to support these.
Trusts can explore whether the scope of the contracts is still right for their needs and how any additional capacity can be utilised. Trusts should also consider whether it is possible to restructure or refinance their existing project as there is the potential for significant savings in some circumstances.
It is unlikely that a Trusts PFI/PPP contract will allow it to unilaterally make amendments. A key step is therefore undertaking a review of the contract and the relationship to understand what levers the Trust has in order to bring the contractor to the table. Unless sufficiently incentivised some contractors may be happy for the current arrangements to persist.
Trusts should also consider whether any renegotiation or modification is within the scope of the original procurement for the contract (or whether this would be a material change). In this regard we now have helpful guidelines contained in Regulation 72 of the Public Contracts Regulations 2015 as to when the change is within the ‘safe harbour’ provisions.
Another consideration might be whether the modification gives rise to any governance or employment issues such as TUPE or redundancy.
There is also a final option which Trusts should not rule out (although normally seen as the nuclear option). In some circumstances it may be appropriate for a Trust to terminate a contract where it believes that removing its shackles will be financially beneficial. Equally termination may be considered appropriate in order to raise service standards by removing an underperforming contractor. The alternative is for the courts to impose a decision which for many really is the last resort.
We have advised a number of public sector entities on the legal elements of making changes to PPP/PFI contracts. This has allowed them to flex the contract to adapt to changing circumstances and make potentially significant savings. Trusts should consider taking the same approach to renegotiation of contracts as if they were starting a new procurement i.e. know what they what to achieve and assess the risks before proceeding.