In 2012 the Treasury issued “A new approach to public private partnerships”, otherwise known as PF2. Whilst an improvement on the original PFI, we believe that PF2 has failed to address some important issues. Here we look at four problem areas that remain in PF2, which continually arise in our work with the Public Sector helping to manage their existing PFI contracts:
1 Use of Advisors
Whilst section 2.2 of the PF2 guidance points to the early appointment of advisors; there is no guidance on the scope of appointments for advisors for the Public Sector. Time and time again we see errors in the operational contracts that are primarily due to the lack of coordination between the legal, technical, financial and insurance advisors’ scope of service. The reality is that a commercial lead should be appointed to oversee the work carried out by these different disciplines to ensure that the awarded contract is fit for purpose.
2 The ability to change the contract
Whilst section 11.2.12 recognises the potential need to change the contract for issues other than Works or Services, unless the standard form explicitly enshrines this right, which it does not, it will remain the subject of continued disputes with the private sector.
3 Persistent Breach
The current guidance (23.2.3) is that minor breaches should be dealt with via performance points, with persistent breach termination rights only being enshrined in the contract if the performance points do not adequately incentivise the private sector to rectify minor breaches. Experience to date has shown that remedies using performance points are treated by the private sector on a purely business case basis. If the performance points are worth a deduction of £1 but the cost of rectification is £10, they will rarely bother to rectify the breaches. As such we believe that it should be mandatory for persistent breach termination rights to be enshrined in the PF2 contract.
4 Due diligence over subcontracts
Section 27 does make a small number of recommendations over the level of due diligence that an Authority should carry out on the subcontracts. In reality this is where any Authority should ensure that a high level of due diligence is carried out. The Authority needs an in depth understanding of a whole range of issues: the way the subcontractors have priced delivery, levels of margins, loss of profit rights for early termination, responsibilities for latent defects, and risk allocation. The list of issues that can fundamentally affect an Authority over the lifetime of the contract is vast and PF2 guidance does not go nearly far enough.
1 Use of Advisors
Whilst section 2.2 of the PF2 guidance points to the early appointment of advisors; there is no guidance on the scope of appointments for advisors for the Public Sector. Time and time again we see errors in the operational contracts that are primarily due to the lack of coordination between the legal, technical, financial and insurance advisors’ scope of service. The reality is that a commercial lead should be appointed to oversee the work carried out by these different disciplines to ensure that the awarded contract is fit for purpose.
2 The ability to change the contract
Whilst section 11.2.12 recognises the potential need to change the contract for issues other than Works or Services, unless the standard form explicitly enshrines this right, which it does not, it will remain the subject of continued disputes with the private sector.
3 Persistent Breach
The current guidance (23.2.3) is that minor breaches should be dealt with via performance points, with persistent breach termination rights only being enshrined in the contract if the performance points do not adequately incentivise the private sector to rectify minor breaches. Experience to date has shown that remedies using performance points are treated by the private sector on a purely business case basis. If the performance points are worth a deduction of £1 but the cost of rectification is £10, they will rarely bother to rectify the breaches. As such we believe that it should be mandatory for persistent breach termination rights to be enshrined in the PF2 contract.
4 Due diligence over subcontracts
Section 27 does make a small number of recommendations over the level of due diligence that an Authority should carry out on the subcontracts. In reality this is where any Authority should ensure that a high level of due diligence is carried out. The Authority needs an in depth understanding of a whole range of issues: the way the subcontractors have priced delivery, levels of margins, loss of profit rights for early termination, responsibilities for latent defects, and risk allocation. The list of issues that can fundamentally affect an Authority over the lifetime of the contract is vast and PF2 guidance does not go nearly far enough.
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