We live in straightened times. For the first time in more than a decade, there is huge pressure to make cuts from both capital and revenue budgets. We are told that we will need to do more for less and that there will be no ring fenced assets. This article considers what this means for operational PPP projects: public bodies need to review their contracts generally to see whether they meets current needs and consider whether their approach to change and, benchmarking/market testing might be improved, while, at the same time, preserving the relationship they have with their private sector partner.
Is my contract fit for purpose?
First, is my contract fit for purpose? Many operational PFI projects were conceived more than a decade ago and at a time when understanding of PFI was in its infancy. They may have specifications which are no longer fit for purpose and be in need of a general updating in line with best practice. To the extent that change relates to the nature or configuration of the services or facilities then the public body will have the contractual right to require changes to be made. What is therefore required is a general review of the project in the light of current circumstances.
Assuming that change is needed how should it be implemented? In 2008 3 documents on change in PFI projects were published, the National Audit Office’s ‘Making Changes in Operational PFI Projects’, the House of Commons Committee of Public Accounts, ‘HM Treasury: Making changes in operational PFI projects’ and finally, the Operational Taskforce Note 3, ‘Variations Protocol for Operational Projects’.
The NAO and House of Commons reports concluded broadly that value for money was not being obtained in relation to individual changes to existing projects. Recommendations included that competitive tendering should be undertaken where authorities deem this to be value for money; authorities need to put in place consistent and robust means to validate the costs of small changes and should bundle together the processing of small changes; authorities should explore with their private sector partners the feasibility of clarifying earlier contracts to bring them into line with best practice; authorities should develop forums whereby questions and answers on the handling of changes and their costs could be shared and contract management teams should be properly resourced.
Operational Taskforce Note 3’s principal objective is to help authorities put in place a voluntary protocol for managing variations during the operational phase of their PFI projects. The protocol suggested is essentially the same as that mandated under SoPC4 for new projects. Key elements of the protocol are therefore different procedures for different types of change (small, medium, large) and customisation of the protocol to fit the types of change that are likely (functionality/capacity/service specification). It appears that few existing schemes are adopting the protocol.
So how do you introduce the protocol to an operational project? From a strict legal perspective, public bodies have no right to introduce changes of this nature. It may be that pressure can be applied as the contractor is bidding a current scheme or has entered into a more recent scheme with the protocol but this is unlikely in many cases. It may also be that Partnerships UK can convince the contractor of the merits of adopting a protocol of some description. Failing this, areas of the project where the SPV is looking for changes will have to be looked for where some sort of win-win can be established.
How is the benchmarking/market testing regime working in practice? Any scheme which commenced operation before 2004 is now likely to have undergone some form of benchmarking or market testing exercise. Many early schemes have no market testing regime or if they did contained provisions which were difficult to apply. The Operational Taskforce’s Note 1 in October 2006 covered benchmarking and market testing. Recommendations include early and thorough planning for benchmarking/market testing; making sufficient resources available; and ensuring open and fair competition. Other questions include whether schemes lacking market testing should now adopt such a mechanism and whether schemes with unsatisfactory schemes should endeavour to update these in line with current market practice.
Lastly, how is my contract faring in the real world? Early contracts were drafted at a time when PFI was being made up as it went along. Many of these contracts offer authorities significantly less protection than their successors. Often the team that negotiated the deal is long since departed. Relevant questions include: is the SPV in compliance with the contract? has the SPV carried out the obligations applied to it? Are any deductions due under the payment mechanism? Are there aspects of the contract which do not work in practice? What is best practice in applying the contract? Can my individual contracts be aligned with others I am running? While it may not be possible to change all of these, it may be possible through training and review to improve the way the contract is being operated resulting in a better service for the public sector. Operational Taskforce Note 2: Project Transition Guidance considers some of these issues.
The performance of operational PFI contracts is about to become a political issue. It will be hard to defend the ring fenced nature of PFIs when non-PFI assets are facing swingeing cuts. Project managers will need to be able to demonstrate that savings are being made and that promises are being delivered on.