Consider how different the world today looks compared to 25 years ago. 1992 was a time of fax machines and VHS players, smart phones and on-demand TV were the stuff of science fiction. The changes since 1992 have been significant and the rate of change is likely to increase.
It's worth reflecting that 25 years is the typical term for a PPP/PFI contract. Local authorities should therefore consider whether their PPP/PFI contracts have kept up with the pace of change and, if not, whether varying these arrangements could deliver significant savings.
Central Government has for a number of years encouraged the public sector to consider the potential savings available in operational PFI/PPP contracts. For instance, HM Treasury published guidance on areas in which savings may 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 National Audit Office has also recently announced that it will be reporting on making savings in legacy PFI contracts so this is clearly something at the forefront of peoples' minds in government.
Checking behind the sofa
As the core grant to local government will be phased out by 2020 now is a pertinent time to consider the opportunities for savings within operational PPP/PFI contracts. The most fruitful areas for renegotiation will depend on the specific requirements of the authority and contents of the contract but potential areas to consider include:
- Reviewing service standards – are these still aligned with the authority's requirements, could services standards be lowered or removed to reduce costs or standards maintained but achieved in a more efficient way for example due to changes in technology
- Removing/re-scoping soft services – in some cases, it may represent better value for money to remove soft services (for example cleaning services) from the contract. These services could be delivered by the local authority or subject to a separate procurement exercise
- Refinancing the project – the cost of borrowing is currently much lower than when many projects completed therefore refinancing could deliver significant cost savings. This could be through utilising new sources of private funding or alternatively prudentially borrowing. In more recent PPP/PFI contracts there is often a specific mechanism to allow project refinancing and dealing with how any savings are shared between the parties
- Change in law risk – where general changes in law come into effect during the operational phase of a contract local authorities have commonly shared the capital costs of such changes with contractors. There may be financial benefits in the authority taking back the contractor’s share of risk.
PPP/PFI contracts typically include a change protocol through which an authority can implement changes. It should however be noted that any changes will need to be agreed with the contractor and may also require approval from the project funder.
It's therefore important at any early stage to review the contract to assess what the potential areas for saving are and what levers may be available for the authority to persuade the contractor to engage in the change process (for example a contractor may be able to lower the unitary charge if it is taking less change in law risk).
Additionally, authorities should consider how any changes can be sold to funders. This may require the provision of assurance regarding the impact of the change on the risk profile of the project and putting in place mitigation for any risks identified. Finally, it is worth noting that approval for changes may be needed from central Government if the project benefitted from PFI credits.
We have worked on many projects where it has been in all parties interests to agree a change to a contract as there are mutual benefits for example a project refinancing which can deliver savings to both parties.
When making changes to contracts local authorities should be conscious of their duties under the Public Contracts Regulations 2015 (PCR) and ensure that there is no State aid arising from any variation. Regulation 72 of the PCR sets out a number of "safe harbours" within which local authorities may vary contracts without breaching procurement rules. These safe harbours therefore offer a useful starting point when considering the scope of potential changes which may be permissible. It's also worth noting Regulation 72 applies retrospectively so any contracts entered into prior to the PCR coming into force will also benefit from the safe harbours.
PPP/PFI contracts have delivered infrastructure and services to countless local authorities and communities, they should however be subject to review to ensure that they still represent best value for money. Given the advances in technology and methods of financing there are numerous opportunities for local authorities to make savings on their existing contracts if they are subject to sufficient scrutiny. These opportunities should not be ignored. Those authorities which do ignore them may find that they have a contract which is a VHS player when they should have a contract that delivers on-demand.