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P2G LLP

The Monthly Report

7/10/2019

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The principle of all PFI projects is that Project Co (and their subcontractors) should self-report against their own performance and declare to the Authority any areas of underperformance against the Service standards. The Monthly Report is where they should do this. 

It is perhaps naive to believe that this is going to work. How many times have you sped down the motorway and then called the police at the end of your journey in the knowledge that you will be fined and awarded penalty points? It just isn’t human nature and, certainly, it isn’t typical for commercial organisations to create a culture that expects their staff to purposefully diminish their returns on a contract in order to be contractually compliant.

On this basis alone, it is important for any public sector organisation to actively read and question the Monthly Report and to ensure that it properly addresses all of the requirements under the contract. 

The minimum requirements for the Monthly Report are typically set out in both Schedules 14 and 18 of standard form contracts and will include the following:
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  • Incidences reported to the helpdesk, including the target Response Times and/or Rectification Times and those achieved;
  • Maintenance and other task based activities carried out in the month;
  • Maintenance and other task based activities planned for the next month;
  • A summary of all Failure Events and Quality Failures (or equivalent);
  • The effects of these Failures;
  • A time frame, in hours, of any event not Rectified on time;
  • The deductions to be made from the Service Payment in respect of Failure Events; and
  • The number of Service Failure Points awarded in respect of each Service for that Contract Month.

However, for each Service that is covered by the Project Agreement, it is important to go back to the Service Level Specification and look at the requirements. 

On most standard form contracts the Key Performance Indicators (KPI’s) or Service Parameters (SP’s) for each Service are typically well defined and stipulate what should be measured to demonstrate compliance. There can be up to 45 KPI’s per Service on a typical contract, so if there are say 11 Services (General, Estates, Helpdesk, Cleaning, Catering, Portering, Security, Telecoms, Pest Control, Waste and Energy Management) that could easily amount to in excess of 350 individual scores that need to be reviewed and critiqued each and every month. 

What is not always well defined, though, is the method of monitoring and the source data that will be utilised. 

For Reactive tasks, the method of monitoring is invariably measured using the Helpdesk, provided that Project Co (and their Service Providers) are properly reporting all reactive tasks using the Helpdesk (see our ‘Follow on tasks’ post). What is often missing, however, is clarity around the method of measurement for qualitative or planned tasks. It is therefore important to sit down with the Project Co and Service providers to check whether the contents of the monthly report do in fact evidence compliance with each of the KPI’s or SP’s.

Typically, the Authority will have a defined time frame to raise any issues with the self-declared scoring. This is typically two months, although in order to get any issues properly credited in the current month’s invoice, you may have as little as 5 days. Once two months have passed, the Monthly Report and the data it contains become the sole record for the period, with no challenges able to be raised except in cases of deliberate misrepresentation, gross incompetence, gross negligence, or fraud.

P2G actively monitor the performance and monthly reporting on a number of NHS PFI projects and our experiences to date suggest that there is a large divergence between reported and actual performance when measured against the contract. If you are interested in checking whether you are receiving the Services for which you are paying, please feel free to get in touch. 

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Why aren’t we seeing more PFI savings?

20/10/2014

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We know that many PFIs are overly expensive, by which we mean that the financing and delivery of services, to the same facilities and to the same standards, could be achieved for a substantially lower cost over the existing contract term.

We also know that PFI contracts contain variation mechanisms via which the public sector is able to enact changes to the existing arrangements. In short PFI contracts can be changed.

PFIs are expensive   +   PFIs can be changed   =   ?

The case for the public sector to pursue savings seems so obvious yet we hear of so few examples. On the latest available data, 566 PFIs have yet to report savings *. Why is this the case? We suggest that there are 5 main reasons.

1 Priorities
Many Authorities have not seen PFI as a priority. Where PFI costs are a small part of the budget, e.g. schools within Local Authorities, other areas have been turned to first when looking for savings.

2 Lack of knowledge
There has long been the perception that PFI contracts cannot be altered. This is a misunderstanding of the nature of the agreements. And there have been few publicised examples of restructuring to spur others on. Where they exist, Authorities are either reluctant to make deals public or are prevented from doing so by confidentiality clauses. Media efforts have, to date, been poorly directed.

3 Expense
Both the identification and delivery of savings requires resources. The variation and amendment of contracts requires lawyers and, often, other advisers. The Authority has to spend money to save money. Even committing to expenditure does not guarantee success and, therefore, the prudent nature of public sector spending can often mitigate against its own interests.

4 Lack of good advice
Where is an Authority to turn when wishing to make savings? Lawyers and accountancy practices are expensive and not traditionally good at operating commercially outside their traditional area of expertise. Management consultants do not have a track record in the area and tend to bolt on PFI to their traditional areas of expertise. Semi-public bodies, such as Local Partnerships, are expensive and have yet to deliver significant savings. It is for this reason that P2G was formed. We identify savings at no risk, and with no commitment, to the public sector.

5 Concern over ‘relationships’
The public sector have often, curiously, acted as the junior partner in PFI. The premise of PFIs, that the private sector provides the monitoring of performance, the facility and ancillary services, whilst the public sector concentrates on the teaching / nursing, means that the most significant involvement of the public sector is in paying the bills. This can lead an Authority to be reluctant to rock the boat, even where self-monitoring is clearly not happening. 

There is also an element of fear. The private sector is seen as a well-funded beast with big-name advisors and lawyers on tap. Changes that may lead to reduced private sector returns are likely to be resisted and disputed. Such an action could be met with retaliation, e.g. against late payment by the Authority, or just making future operation more difficult.

The truth is that these are contracts and should be dealt with professionally by both sides.


What can be done?
We believe that each Authority should, as a minimum, understand what savings are possible on each of their PFI contracts, and the risks of pursuing these savings.

P2G is a Social Enterprise that has, so far, helped deliver £297 million in savings to the public sector. No other adviser has this track record. We offer a no risk, commitment-free, service in identifying PFI savings. We are here to help.


* Savings from operational PFI contracts (National Audit Office) November 2013
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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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PFI Insurances

24/10/2013

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Under a typical PFI contract, insurance is procured by the private sector. In the operational phase this generally includes cover for material damage, business interruption, public and third party liability.

At Financial Close, insurance has historically been priced on the basis of a stand-alone project to ensure that insurance can be re-provided in the event of Lender or Authority step-in.

Over time, insurance premia for PFI risks have reduced considerably for two main reasons:

  • Underwriters increasingly view PFI as a well maintained sector with relatively low risks and the last few years has seen a number of new entrants into the PFI sector, eager to do business.
  • Post operational commencement, many projects have grouped their insurances under a portfolio arrangement facilitated by the major PFI shareholders. Whilst still being individual project policies, the private sector has aligned renewal dates on projects with the resultant benefit of lower premiums from underwriters. This is commonly referred to as the “portfolio effect”.

Most PFI contracts since around 2003 have benefitted from Gain or Risk Sharing Mechanisms with respect to insurance premiums. These typically allow for the public sector to benefit from reductions (or contribute to increases) in actual insurance premiums when compared to the original contract price at Financial Close.

However, we are seeing many instances where the private sector has argued, when presenting risk share savings to the public sector, that the “portfolio effect” is an issue that should be carved out from the mechanism due to the fact that it is entirely down to their actions. Often, the public sector have accepted this argument. In addition, although most portfolio insurance placements include a low claims rebate, the private sector tend to omit this from their calculation of any gainshare. Together, this approach means that the private sector is top slicing the benefit that risk sharing was there to give.

It should be remembered that the private sector is partnering with the public sector for long periods. The terms of the agreement generally require the private sector to cooperate, pursue good industry practice, and mitigate costs. We would argue that actual means actual and shouldn’t be subject to manipulation. More importantly, the public sector can obtain insurances in line with those obtained by the private sector.

P2G, through its frameworks with a well known PFI insurance broker, is able to facilitate equivalent cover at market rates for the benefit of the public sector that at least match the premiums that the private sector can procure at, inclusive of their “portfolio effect”.

What does this mean for public sector bodies?

No longer should a public sector body allow the private sector to run any sort of argument about portfolio rates being excluded from a sharing mechanism. The result should be real returns to public sector budgets. There are over 900 PFIs and the benefit accrued from this one small measure is gained annually. The benefit to the exchequer is huge.


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Renegotiating PFI contracts

3/7/2013

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One of the most common questions we are asked is whether our involvement on a PFI project will have a detrimental effect on relationships with the private sector provider and ultimately will lower performance. The short answer is that it will not.

If you have a PFI contract, deciding to renegotiate elements of it is a complicated affair fraught with potential pitfalls. However the private sector expect it to happen and are often astounded that it doesn’t happen more frequently. PFI contracts are not as inflexible as many people choose to believe.

It is possible to cut costs in a successful PFI partnership. It certainly isn’t always easy, but with the correct approach and buy-in from key stakeholders, one can reach an agreement that benefits all parties in the long term.

Before you do anything you need to gain a better grasp of exactly what you hope to achieve through renegotiation. “Cutting costs” is all well and good, but you need to consider how costs will be cut. Renegotiating a contract under such circumstances is a delicate enough process as it is, so it is important that you equip yourself with an understanding of your intended outcomes before you approach your partner.

Most PFI providers have a large exposure to the public sector and many will have signed up to the new Treasury Code of Conduct, so it is important to use these levers to help bring pressure to bear on them to assist. However, far more important is your approach to them as an organisation.

All PFI contracts are “owned” by Special Purpose Companies (SPC’s). Their raison d'etre is to deliver long term sustainable returns for their shareholders. Given the length of PFI contracts, it is not in their interests to maintain their margins to a point where their public sector partner is put in serious financial jeopardy; but ultimately they are there to make a profit for their shareholders and weaving a path between these positions is a balancing act that requires finesse to deliver.

If you operate a traditional buyer/supplier relationship, this will make delivery harder as your private sector partner is likely to take a short-term and solely profit-driven approach to the contract. You may find that renegotiation or re-shaping is more adversarial in these circumstances.

If, on the other hand, you do have a true partnership/alliance operating model, your partner will understand your financial challenges and they are far more likely to work with you on potential solutions that can appeal to both their sense of partnership and moral obligation to work together for the public good.

Ultimately, a wise private sector partner will understand the long term benefits of working in true partnership with a public sector organisation, be it a local authority, NHS trust, police force or the like.

Partnership also extends to the way the contract fundamentals are handled. 
Knowing exactly what you should be getting and holding the private sector to account for failure to deliver are key components of successful contract management. Doing so will, in the long term, improve your ability to successfully renegotiate elements of the contract to deliver savings. However the way you conduct yourselves and your ability to think through the issues that your ‘partner’ will face,  as a result of the changes, is vital.

There is nothing simple about the process of renegotiating a PFI contract. However, a healthy dose of common sense (including pro-actively helping the provider open new doors so it can address new opportunities) and a willingness to work in true partnership with your provider will take them and you a very long way towards achieving a positive outcome.


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    Authors

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

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P2G LLP
A Social Enterprise Partnership
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