New guidance on making savings on operational PFI contracts
In the last month HM Treasury has issued guidance on making savings in operational PFI contracts. The guidance follows the draft guidance issued in January this year and is intended to assist public sector PFI Contract Managers to identify and implement savings measures that would reduce costs whilst maintaining frontline services.
The guidance focuses upon four pilot cost saving reviews of operational PFI projects, one by HM Treasury with the Cabinet Office and three by the MoD. The pilot reviews have confirmed the draft guidance recommendations for achieving operational savings identifying three main categories as follows:
1. The effective application of existing contract provisions.
2. Optimising the use of asset capacity.
3. Reviewing the specification of soft services.
The guidance recommends that all authorities with operational PFI contracts instigate a contract savings review if a comprehensive review has not already been undertaken. Whilst recognising that each PFI is individual, the pilots have confirmed annual savings of around 5% of the annual unitary charges are achievable.
The guidance highlights the following issues that may generate savings via the effective application of existing contract provisions:
The guidance recognises that PFI projects must be considered in the context of the public sector’s total asset base and recommends the increase in throughput or operational density as the most straightforward route to savings on a per unit basis, such as a “Total Place” approach to public services within a particular location. Such an approach should lead to:
Whilst the guidance recognises that PFI does not necessarily contract for the provision of “gold plated” services, it does recognise that if authorities believe that they are buying more than is required to deliver the service or are incurring additional cost as a result of inconsistent application of services standards across PFI and non PFI facilities, then a more appropriate services specification could be introduced as a variation. Such measures are clearly project specific but could potentially include:
Notably any changes to the services specification should not
harm the core function of the project or contravene safety
standards, and any reduction in specification should not lead to
PFI provider risks being passed back to the Authority without a
careful vfm analysis. The guidance recognises that, as a
general rule, changes to the contracted lifecycle obligations can
risk undermining the long term asset risk transferred to the
Project Co and as such it is unlikely to represent vfm to remove
hard facilities management services and lifecycle/major maintenance
from the contract or introduce value testing of such
The guidance is careful to note that standards should not be relaxed if there is a concern that the PFI provider is not performing well against the existing requirements of the contract. In this case, the payment mechanism should be used appropriately to ensure that the expected service level is being achieved and deductions made (or performance penalties awarded) if not.
In terms of timing, the guidance recommends timing any changes to the service specification to the soft services market testing/benchmarking date (typically every 5 years), so that changes can be re-priced under competitive conditions. Market testing and benchmarking can be time consuming and expensive for an authority and therefore is may benefit an authority to “bundle” their PFIs, or for two Authorities to carry out the exercise together (particularly for projects that have common equity owners). This may require the exercises to be brought forward or deferred to align their timetables, although this may require lender consent if lenders deem this to impact their risk profile.
In addition to changes to the services specification authorities may also wish to consider changes to the terms of the contractual arrangement itself. The guidance suggests two possibilities:
The guidance recognises that PFI projects are complex, long term arrangements with whole life costing, detailed risk allocation and clearly defined termination provisions. As such, strategies applicable for saving costs in PFI contracts need careful consideration.
Department PFUs can provide invaluable advice and guidance for Authorities in achieving savings in operational PFIs. Given the risk of undermining risk transfer within a PFI contract, the guidance also recommends that specialist support is sought before implementing any cost saving measures, unless the Authority is experienced in that area. Failure to do so could potentially result in short term savings at the expense of long term vfm. Bevan Brittan has advised on over 150 PFI projects and over 600 complex procurements including PPP schemes, giving us a wealth of experience on which to draw to assist authorities in implementing HM Treasury’s guidance and to realise savings on their long terms contracts.
If you want to discuss the more detailed recommendations from HM
Treasury's guidance, or to discuss your specific PFI/PPP contracts,
please contact Sharon Renouf, Duncan Weir or Louise