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PFI, the baby, and the bathwater. Why it’s important to take stock of where we are.

10/6/2014

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Hexham Hospital is about to go through a voluntary termination. Reportedly, this involves Northumbria NHS Trust paying compensation to the private sector Special Purpose Company (SPC) of £114m. As a result, the Trust will regain ownership and management of the facility in all aspects and save £3.5m per year (£67m over the original life of the PFI contract).

What does this mean?

It means that, for this particular deal, the Trust was able to borrow sufficient funds (in this case from the Local Authority). It means that the cost to the Trust in re-procuring the services to run the hospital for the remaining years of the PFI, together with paying off the private sector for their contractual loss of profit, was £67m less than the cost of continuing to pay the PFI unitary charge.

To put all this in context, according to HM Treasury, the capital cost of the hospital was originally £54.1m.

The Trust Chief Executive called the hospital a “fantastic facility” that could never have been built without PFI. Nevertheless, the PFI was not seen as offering value for money in the current climate. Northumbria NHS Trust are to be congratulated for assessing their options and to have negotiated their way into a significant saving. It has taken them two years to do so.

Is this a model that other NHS Trusts and Local Authorities can follow? Unfortunately not all PFI contracts allow for voluntary termination. In addition, the compensation provisions vary, making termination more or less attractive.

And, crucially, not all PFI contracts are a bad deal for the public sector.

It is true that many PFI contracts have proved expensive, particularly the earlier deals. However, over time, the Treasury refined the standard form of PFI contracts. Mistakes were rectified, the imbalance between amount paid and the risks transferred was addressed.

The later PFI deals were a vast improvement on the earlier incarnations. If we look at later deals, in particular those done in Scotland, PFI was cut down to design, build and maintain. The provision of soft services (cleaning, equipment, catering, portering etc.) was generally outside the PFI. In our desire to rectify the wrongs of early deals we should not be blind to the fact that later deals provided a competitive procurement avenue. We should not throw out the baby with the bathwater.

What should a Trust (or Local Authority) do?

An Authority should be aware of the the difference between the costs of the PFI to the contract term, and the costs of running the facility under self-procurement. An Authority should also assess whether the contract can be terminated, and the amount of compensation payable. If the procurement saving is greater than the compensation payable, then the Authority should seriously consider its options.

Importantly, however, PFI contracts contain variation provisions. This means that the Authority has rights to change the contract. In many cases, significant savings can be made in this way. In assessing value for money, therefore, Authorities need to conduct a full review of their PFI contracts.

PFI contracts are complex and, to date, much of the experience and expertise has sat on the other side of the table. It’s different now. We would urge Authorities to seek expert advice and develop a plan for their PFIs. If value is already being achieved, that’s great. If not, then there is work to be done.

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PFI Code of Conduct - Progress?

2/6/2014

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On the 14th June 2013, HM Treasury published its Code of Conduct for Operational PFI / PPP contracts with the intent of driving better behaviours, particularly amongst PFI providers, in support of its aim of making savings.

It is fair to say that the Code of Conduct’s reception has been lukewarm. It has been variously described as “a modest attempt to influence behaviour” and as “toothless”. It’s basic commitments include each party:


  • agreeing a single point of contact for each project;
  • engaging in a constructive and timely manner;  
  • meeting on a regular basis to discuss savings and operational efficiencies; and
  • working together to identify operational improvements and develop joint strategies.  

In addition, the private sector must not unreasonably refuse consent to variations suggested by the public sector and must provide clear and transparent information regarding a project’s consumables, energy and utility usage and costs. In return, the public sector must give reasonable and prompt consideration to any efficiency opportunities identified by the private  sector.

Despite the mixed views, almost one year on from the Code of Conduct’s release, we examine the uptake.

To date, there have been 159 signatories to the Code. They are made up as follows:

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Unsurprisingly, the largest percentage of signatories are the public sector themselves. It would, after all, be difficult to lecture the private sector if you haven’t signed up yourself.

Turning to the main private sector investors / sponsors, there are currently 40 signatories. The HMT Current Projects List (last updated in March 2012) lists over 130 different investors in the UK’s PFI projects; meaning that almost 70% of the investors have yet to sign up. Is it not time for a complete name and shame list? A few well known names, who are notable by their absence, are:

3i Group Plc
Babcock International Group Plc
BAE Systems Plc
Biffa
BT Plc
Dalmore Capital Limited
E.ON
FCC Construction
G4S Plc (other than in respect of one project)
Lend Lease Investment Management
Lend Lease PFI/PPP Infrastructure Fund
Macquarie
Morgan Sindall Group Plc
Veolia

The next group of signatories are the funding institutions and monolines who provide the majority of the debt or bond finance and, importantly, can often either block savings measures from being implemented completely, or seek to charge disproportionate fee levels for agreeing to them.

The HMT Current Projects List does not list funders on projects (perhaps it should) but notable absentees include:

Ambac
Assured Guaranty Municipal
AXA Group
Bayern LB
Commerzebank
European Investment Bank
Financial Guaranty Insurance Company (FGIC)
Heleba Landesbank
Municipal Bond Insurance Association (MBIA)
Prudential

Finally, there are currently 717 operational PFI contracts covered by the Code of Conduct, each one with a separate project company. Yet only 28 of these have signed up, a miserly 4%. Well done to those who have.

From the above figures, it is clear that there is a long way to go to have a private sector that is committed to the Code of Conduct. And yet many of the companies and institutions who have not signed up continue to benefit from new contracts with UK plc. Is this the right message to send?

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    Authors

    The authors have experience of more than 100 PFI projects in multiple sectors.

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