HM Treasury has been concerned with ensuring that operational Private Finance Initiative (“PFI”) contracts be reviewed to identify where appropriate cost savings can be made, without affecting frontline services.

Draft guidance in relation to making savings was issued in January 2011 and in February, Lord Sassoon launched a pilot project to enable, test and further develop draft guidance and review potential savings measures. The pilot project was to examine the PFI contract in place for the Queen’s Hospital in Romford (and also considered three further projects (MOD Main Building, Corsham and Welbeck Defence College)), with the intention that lessons learnt could be utilised to drive savings across the wider portfolio of PFI contracts.

As a result of the pilot project being completed, HM Treasury updated the draft guidance on 19 July 2011 and the pilot reviews have confirmed the draft guidance recommendations in relation to operational savings as follows:

  1. Effective Management of Existing Contract Terms – this has included managing existing cost/gain share mechanisms (for example, in relation to insurance and energy costs);
  2. Optimising the Use of Asset Capacity – looking at mothballing or subletting of surplus capacity (for instance the subletting of a surplus ward to a private healthcare provider); and
  3. Reviewing the Specification of Soft Services - avoiding “gold-plating”, ensuring the consistency of standards across PFI and non-PFI facilities, reviewing and standardising soft services specifications and terms whilst maintaining operational standards.

HM Treasury have confirmed that the pilot projects have indicated that savings of around 5% of each PFI annual unitary charge are possible and that they are seeking to deliver savings of £1.5 billion across the 495 operational PFI projects in England. HM Treasury have stated that these savings can be fully recycled back into frontline services by the contracting authority, however it is not clear what form this recycling will take.

The guidance provides further support to PFI contract holders by setting out recommended review steps. HM Treasury stresses the need to ensure that “best value” provisions are followed and that annual review/performance assessments with contractors are conducted by the Authority.

Importantly, for investors/subcontractors/lenders, HM Treasury notes that it has held discussions in relation to the implementation of a voluntary code of conduct in relation operational savings matters and that it envisages such a code being in place by the end of 2011. This will cover (but not be limited to) agreeing to engage positively in discussions, agreeing to implement SoPC4 transparency provisions and the SoPC4/Treasury Variations Protocol where PFI contracts do not include them and enhancing transparency in reporting from providers of risk capital.

We expect to see an increasing examination by Authorities of their PFI contracts, however parties will wish to ensure that the agreed risk allocation position between the parties is not adversely affected by cost saving proposals.