4ps review of operational pfi and ppp projects · this 4ps report was developed by 4ps in...
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4ps Review of Operational PFIand PPP Projects
AcknowledgmentsThis 4ps Report was developed by 4ps in partnership withChris Wright of Dew Services. 4ps would like to thank DewServices, and the Local Authorities that have contributed tothe review for their assistance in developing this Report.Jubilee Library, Brighton – Prime Minister’s Better PublicBuilding Award (2005 winner).
DisclaimerThis Report has been produced by 4ps to provide assistanceto Local Authorities. The Report has been published in goodfaith by 4ps, and 4ps shall not incur any liability for any actionor omission arising out of any reliance being placed on theReport by any Local Authority or organisation or otherperson. Any Local Authority or organisation or other personin receipt of this Report should take their own legal, financialand other relevant professional advice when consideringwhat action (if any) to take in respect of any initiative,proposal or other involvement with any public privatepartnership, or before placing any reliance on anythingcontained herein.
Copyright© 4ps 2005
All rights reserved. Reproduction or photocopying of thispublication is welcomed provided 4ps copyright isacknowledged and the text is not edited.
1
Section One Introduction 2
Section Two Summary 4Mobilisation and developing the new partnershipPayment Mechanism and Output SpecificationContract
Section Three Findings, conclusions and recommendations 61. Mobilisation and developing the new partnershipDeveloping the new relationship
2. The Output SpecificationClarity of the performance requirementsUnderstanding and using the Output SpecificationDelivering the services specifiedAchieving good designService changesMeeting the response and rectification targets
3. The Payment MechanismUnderstanding the Payment MechanismPerformance monitoring Effectiveness of the payment arrangements The Help Desk
4. The ContractUnderstanding the ContractThe role of the ContractContract flexibilityContract clarification
Contents
2
1 The Private Finance Initiative (PFI) plays animportant role in the delivery of theGovernment’s investment plans for publicservices. This investment programme isdelivering extensive new and modernisedinfrastructure to public services. Evidence todate suggests that the PFI is most appropriatewhere there are major and complex capitalprojects with significant ongoingmaintenance requirements. For theseprojects, the Service Provider can offer projectmanagement skills, innovative design and riskmanagement expertise that can bringsubstantial benefits. Properly implemented,PFI helps to ensure that desired servicestandards are maintained, that new servicesstart on time and facilities are completed onbudget, and that the assets built are ofsufficient quality to remain of high standardthroughout their life.
2 PFI needs to be managed as a maturerelationship between the public and privatesectors that recognises their mutualresponsibilities. PFI relationships are verydifferent from privatisation, in which themarket and price mechanism defines theservice provided. The private sector hasalways been involved in the building andmaintenance of public infrastructure. PFIensures that Service Providers are bound intolong-term operational contracts and shoulderthe responsibility for the quality of the workthat they do. With PFI, the Local Authoritydefines what is required to meet public needsand remains the client throughout the life of
the Contract. Using the Contract, the LocalAuthority ensures the delivery of the outputsit sets and has rights under those Contracts tochange the output required, if necessary.Consequently, with PFI the public sector canharness the private sector to deliverinvestment in better quality public serviceswhile maintaining frontline services in thepublic sector.
3 Nearly 150 local authorities have beeninvolved in PFI projects, and some 292 localgovernment PFI projects have been endorsedby the Project Review Group (PRG) to goforward to procurement. These projects havea capital value of some £10 billion. TheSpending Review 2004 announced a further£7 billion of new funding for local authorityPFI projects, bringing the total fundingavailable for investment in local servicesthrough the PFI to £19 billion by 2007/2008.
4 Of the PFI schemes approved for funding todate, 158 are now operational delivering localservices. In addition, a significant number ofpublic private partnerships (PPP) and long-term strategic partnerships are also inoperation.
5 In bringing all these projects from concept tofruition, invaluable experience has beengained, expertise acquired and lessonslearned. Clearly it is of enormous benefit toboth the public and private sectors todisseminate this knowledge and share theskills appropriately in the development ofsimilar schemes in the future. With thisobjective in mind, over a six-month period the4ps project support team has undertaken areview of some 30 of the operational localgovernment PFI schemes and PPP schemes.The principal aim of the review was to beginto answer the question: Are PFI contractsworking in terms of providing improvedpublic services?
Section 1Introduction
3
6 The team made visits to operational projects inEngland between October 2004 and May2005. Interviews were held with the keystakeholders involved in the management ofthe operational project, including:
• The Local Authority contract manager• The Service Provider representative• A user of the services, for example the head-
teacher in a schools scheme, and tenants in ahousing scheme.
7 The review programme covered all sectors oflocal government where PFI and PPP schemesare operational, and the chart below showsthe coverage of the review by sector:
Figure 1 – Sectors and Projects Reviewed
8 Members of the 4ps team discussed with theLocal Authority contract manager and ServiceProvider representative their experience ofmanaging the operational project; and withusers their experience of service delivery. Toensure consistency of approach, a structuredset of questions was used in the one-to-oneinterviews.
9 The main content of the review examined thefollowing:
• Whether services are being delivered in linewith the approach set out in the ServiceSpecification/Output Specification
• The effectiveness of the Payment Mechanism• How the Contract/Project Agreement is being
used in the delivery of services.
10 The review also explored a range of otherissues, including:
• Handover of the services to a new ServiceProvider
• Change management• Partnership relationships• Benefits realisation• Contract management arrangements• User satisfaction.
11 This report sets out the results of the 4psreview. It comprises:
• Summary • Findings, conclusions and recommendations
in the areas of:- Mobilisation and developing the new
partnership- Output Specification- Payment Mechanism- Contract.
12 The report provides an initial snapshot frominvestigating a sample of operational projectsand will be updated in due course with datacollated from further operational schemes ineach local government service area, which the4ps will continue to review. This work willensure that the lessons learned fromoperational schemes can continue to be usedin the development of new projects.
12%
10%
22%
13%
13%
10%
10%
10%Corporate services
Fire
Schools
Transport
Waste
Leisure
Housing
Social services
4
13 This objective and structured review has givena clear indication of what is being achievedusing the PFI and PPP, and what can be doneto improve the processes. There are successfuloperational PFI projects and this initial reviewof operational PFI and PPP projects across localgovernment sectors has highlighted what isbeing done well, and the issues still to beaddressed in certain sectors.
14 The results of the 4ps review show that the PFIis working well for local authorities. Users andstakeholders are generally delighted with thenew facilities and services now beingprovided, following years of under-investmentin the service. A number of the LocalAuthority schemes reviewed had receivedawards, and Local Authorities were very proudof their achievements.
15 A number of Local Authorities commented onthe high costs of procurement and the lengthof time taken to deliver partnership and PFIprojects, and these remain issues to beaddressed in a number of sectors. It was alsoevident that lessons had been learned, andthat the experience gained would benefit thedelivery of subsequent PPP and PFI schemes.4ps Procurement Packs will also help in thisregard.
Mobilisation and developing the newpartnership
16 Users of the services provided through the PFIand PPP generally returned a highersatisfaction rating than the Local Authority’scontract manager, perhaps reflecting the factthat the users did not experience the day-to-day management challenges faced by theLocal Authority. In local government,partnerships between the public and privatesectors are, with a very few exceptions,working. Service Providers are in the maindelivering the contracted services on time, tobudget and within the Specification, and
consider that they are making a contributionto the delivery of local services. A number ofLocal Authorities commented on howsmoothly the partnership schemes had beenimplemented.
17 The experience of Local Authorities in theoperational phase of their schemes is shownin the review to vary significantly for a numberof reasons. Contract management in thedifferent sectors often calls for a differentapproach. For instance, technical/engineeringservice areas are already familiar with contractmanagement, whereas in other localgovernment sectors there is typically lessexperience of managing major contracts.
18 Continuity of personnel involved inmonitoring performance of the contractedfacility/services emerged in the 4ps review as asignificant issue in a number of the schemesreviewed. Many Local Authorities had alsounder-estimated the scope and costs ofcontract management, pointing to the needfor long-term management issues to be takeninto account during the procurement stage,along with developing partnershiprelationships, knowledge transfer, mutualunderstanding and trust.
Payment Mechanism and OutputSpecification
19 There is also variance between LocalAuthorities in the ways in which they applythe Payment Mechanism for the scheme interms of making deductions and operatingthe partnership, and interpreting the OutputSpecification. In some cases this was due tothe differences in the schemes themselves,but it was apparent that there is room forimprovement to the development of theOutput Specification in some sectors, and tothe performance monitoring regime andPayment Mechanism.
Section TwoSummary
5
20 Output Specifications should be developed ina way that encourages Service Providers to beinnovative in the solutions they offer for theprovision of the contracted facility/services.The 4ps review identified some examples ofinnovative practices or new ways of working,such as initiatives aimed at improved focus onuser involvement. There does however, appearto be further opportunity for Local Authoritiesto reduce the constraints and betterencourage their technical advisors to be moreopen to new ideas and proposals.
21 Service Providers were shown to provide ahigh level of delivery against the OutputSpecification.
Contract
22 In the operational phase of these schemes,some Local Authorities had referred to theContract regularly (principally to clarify serviceobligations), whereas others had not lookedat the Contract since financial close. Thereasons for this difference and the outcomes,are discussed in more detail later in this report.Their findings led 4ps to suggest thatpartnerships sustained over the long-term willfeature respect by each party for theircontractual commitment to work together toresolve difficulties and to seek continuousimprovement, and the achievement of abalance between partnership working andcommercial reality.
23 Very few changes had been made in theoperational phase to the Contracts for theschemes reviewed, although a small numberof schemes had needed to clarify aspects ofthe Contract. Queries had arisen on risktransfer and payment deductions as a result ofdifferent interpretations of the Contractdocumentation, and uncertainty about whatcertain statements meant. Whilst most LocalAuthorities and Service Providers consideredthe Contracts in place to be ‘future proofed’against legislative change, there was someconcern that there was not sufficientflexibility.
24 It was evident from the review that someService Providers were experiencing pressureas a result of price changes in the market,leading to protracted discussions on variationsto the Contract. This has indicated that thesefactors should be considered more effectivelyat the Contract drafting stage, and bothparties need to better understandbenchmarking.
25 The review indicated that there is a need for agreater understanding, particularly on the partof Service Providers, of the independentworking of Local Authority processes.
6
1. Mobilisation and developing thenew partnership
26 Most Local Authority projects are likely toinclude a mobilisation period betweenContract signature and servicecommencement, and as part of theprocurement process the Local Authority willneed to determine those tasks that the ServiceProvider needs to have satisfactorily completedbefore the Service Provider can commence theservices. The tasks are typically documented ina mobilisation plan. The aim of themobilisation plan is to ensure that a safe andcontinuous level of service is provided at thepoint of transfer of service responsibilities, andthat appropriate arrangements are put in placeto communicate the handover arrangementswith users and stakeholders of the service. Themobilisation plan should clearly set out thearrangements for communicating with usersand stakeholders the change.
27 Generally, it was the experience of LocalAuthorities that the mobilisation of thecontracted facility/services was very successful.However, a number of the schemes reviewedhad experienced some challenges during themobilisation period, including:
• Service users adjusting to a cultural change inthe management of the service
• Raised expectations not being met• Too demanding a timescale for completion of
the mobilisation works.
28 A number of Service Providers reported delaysin completing the statutory planning processes.
RecommendationLocal authorities need to be more explicit whendeveloping the project documentation formobilisation responsibilities, ensuring that riskand responsibilities for specific tasks are clearlydefined and understood by all parties. Themobilisation plan should clearly set outresponsibilities for completing any statutoryprocesses.
Developing the new relationship
29 For many of the projects reviewed, the LocalAuthority had made significant efforts tocommunicate with a range of stakeholders and partners to ease the transition to the newarrangements.
30 In a small number of instances, however, thisdid not go far enough, and it was felt thatmore attention could have been focused onthis aspect.
RecommendationThe mobilisation plan should incorporatedetails of how the transition will beimplemented by all parties, and appropriatecommunication arrangements and stakeholderconsultation arrangements should be put inplace and agreed well in advance of‘handover’.
31 In the majority of the schemes reviewed, thetransition to the new Service Provider had gonevery well and within the timescale, despite afew relatively short-term teething problems.
32 In almost all cases, the Local Authority andService Provider described their partnershiprelationships as very good. Whilst theyacknowledged that at times there were naturaltensions in delivering the service, it was clearthat there was a determination andcommitment to making things work through apartnership approach, and a recognition thatthere was a need to foster partnership workingto deliver both a quality service today, and tocontinuously improve the service in to thefuture.
Section ThreeFindings, conclusions and recommendations
7
2. The Output Specification
33 The Output Specification (or ServiceSpecification) is arguably the most importantdocument in the procurement of a projectthrough a PPP or the PFI. The OutputSpecification is the basis through which theLocal Authority defines the services andoutputs that it requires from the ServiceProvider for the term of the project.
34 The Output Specification is the document inwhich the Local Authority states in outputterms what they need to achieve from theservices, and any associated facilities to beprovided. The Output Specification typicallyaims to detail what needs to be achieved nothow it is to be achieved, and a well-draftedOutput Specification is fundamental to thesuccessful delivery of long-term services.
35 Local Authorities need to determine, as partof developing the Output Specification, whatinformation will be required from the ServiceProvider. Local Authorities have typically donethis through requesting contractual MethodStatements (sometimes collectivelyencompassed in a Service Delivery Plan).Method Statements typically form animportant link between the OutputSpecification and Payment Mechanism,setting out in detail (and often in input terms)how the Service Provider will perform theworks and deliver the services. Service deliveryapproaches will inevitably change during along-term Contract and the Contract willneed to incorporate appropriatearrangements for dealing with the necessarychanges to the Service Provider’s MethodStatements.
Clarity of the performance requirements
36 One of the key issues emerging from the 4psinterviews was the need for greater definitionand clarity of the performance standards inthe Output Specification. Differentinterpretations of what was required were
often the cause of disagreements betweenparties, with the Local Authority having oneview on the performance requirement for theservice specified in the Output Specification,and the Service Provider having anotherinterpretation.
37 Local Authorities need to be very specific interms of service standards and performancerequirements to ensure that the Contractdocumentation is tight enough, and notprone to different interpretations.
RecommendationWhen developing project documentation, it isnecessary to ensure that the relationshipbetween the Output Specification and theService Provider’s Method Statements willensure appropriate specificity and risk transfer,as well as providing sufficient flexibility tomeet future operational requirements.Responsibilities should be clearly defined, andLocal Authorities need to be explicit abouthow and what use is to be made of MethodStatements in service delivery andperformance monitoring.
Understanding and using the OutputSpecification
38 Nearly all those interviewed claimed a goodworking knowledge of the OutputSpecification, which were in most casescomplete and fully documented.
We asked individuals “Have you read andunderstood the Service or OutputSpecification for this project?”
92%
8%Yes
No
8
We asked individuals “Is all documentation(Method Statements and OutputSpecification) complete and available for the project?”
RecommendationLocal Authorities should ensure that alldocumentation is complete and available tothe contract manager and Service Providerrepresentative.
Delivering the services specified
39 The 4ps review showed that services weregenerally being delivered in accordance withthe Local Authority’s expectations, and therewas a high degree of delivery against theperformance standards set out in the OutputSpecification. Users and stakeholders areespecially delighted with the new facilities andservices now being provided. The design andcapital works elements of the projects scoredmore highly than the service deliveryelements, possibly reflecting the fact that it iseasier to satisfactorily deliver a new facilitythan new services, where the achievement ofsatisfactory performance is often moresubjective.
40 Service Providers interviewed believed thatthey were delivering a good service and had‘made a real difference’ to the delivery of localservices.
Service Provider“We have, from the time the school opened,received feedback from the headteacher, staffand parents that they were delighted with thenew school environment. We hope that thistranslates into improved educationalattainment.”
41 Local Authorities and users were very satisfiedwith the design and construction of the newfacilities. With the exception of a smallnumber of projects, all those reviewed hadbeen delivered on time, and the majority hadbeen delivered within the agreedspecification.
We asked individuals “Has the build/installation/investment programme beencompleted in accordance with the OutputSpecification?”
We asked individuals “In your opinion, are theservices being delivered in accordance withthe Output Specification?”
5%
82%
13%
7%
71%
22% All of the time
Most of the time
Some of the time
5%
85%
10% Yes
No
No response /
Non-applicable
Yes
No
No response /
Non-applicable
9
We asked individuals “In your opinion, areservices being delivered in accordance withyour expectations?”
Project Owner“To compare the leisure service now with theprevious one is like ‘chalk and cheese’. This isa fantastic modern leisure centre which servesthe needs of the community, and is somethingwe are all very proud of. The previous facilityand service was simply unfit for purpose, andbeyond modernisation through arefurbishment programme. With the newfacility, participation rates have improved andthe school swimming programme can now bedelivered in a quality learning facility.”
Achieving good design
42 The majority of the Local Authorities reviewedwere very satisfied with the new ‘asset’, andthe majority of respondents believed that thenew facilities had been well designed.
We asked individuals “Do the assets / facilitiesmeet your requirements in terms of gooddesign?”
We asked individuals “During the investmentprogramme, were the relevant good practicerequirements on design followed by theService Provider?”
43 The review identified some examples ofinnovative practices or new ways of working,many associated with increasing userinvolvement. Whilst new ways of working andinnovation are inevitably always going to beincremental, and perhaps more likely on thelarger schemes (given the greater benefits thatare likely to accrue), there appears to be someopportunity for Local Authorities to reducethe constraints and better encourage theirtechnical advisors to be more open to newideas and proposals.
RecommendationLocal Authorities need to encourage andincentivise new ways of working andinnovative approaches.
Service changes
44 A number of the Local Authorities interviewedhad needed to review the OutputSpecification since financial close; about two-thirds of those interviewed believed changeswould be necessary in the future. Many of thechanges that have been necessary appear tobe linked to interpretation issues on what theservice requirement meant in practice.However, changes have also been made toreflect new regulatory requirements, and forchanges in the project scope. Whilst changesare inevitable, making the necessary changeswas in many cases a drawn-out process.
19%
62%
19% All of the time
Most of the time
Some of the time
Yes
No
No response /
Non-applicable
Yes
No
No response /
Non-applicable
10%
85%
5%
5%
82%
13%
10
We asked individuals “Have you had to reviewor clarify the Output Specification since theContract was awarded?”
We asked individuals “Do you anticipate thatchanges will be required to the OutputSpecification to meet the Local Authority’sfuture requirements for the services?”
RecommendationGreater scrutiny and testing of the servicerequirements is needed at the procurementstage in a number of sectors. Local Authoritiesshould ensure that the Contract Managerbecomes involved during the procurementprocess, and that the Contract Manager fullyunderstands the proposed servicerequirements. 4ps is also to review the OutputSpecification drafting used in a number ofsectors to identify if improvements arenecessary.
Meeting the response and rectificationtargets
45 Local Authorities were generally satisfied withthe way in which service failures had beenrectified.
We asked individuals “Are response andrectification times in your view being met?”
5%
58%
37%
10%
66%
24%
All of the time
Most of the time
Some of the time
5%
73%
22%
Yes
No
No response /
Non-applicable
Yes
No
No response /
Non-applicable
11
3. The Payment Mechanism
46 Since the essence of a PFI arrangement is theprocurement of a service, sub-standardperformance in the delivery of that service bythe Service Provider should result in reducedpayment by the Local Authority or, in certaincircumstances, no payment. The PaymentMechanism will, therefore, be fundamental tothe PFI Contract, as it puts into financial effectthe allocation of risk and responsibilitybetween the Local Authority and the ServiceProvider.
47 As the Payment Mechanism is there to ensurethat the Local Authority’s objectives for theproject are being delivered, it should be linkedto the outcomes and outputs for the projectset out in the Output Specification. ThePayment Mechanism should includeappropriate incentives for the Service Providerto deliver the service in a manner that givesbest value, and promotes partnershipworking. The key to a successful PaymentMechanism is the relationship andinterdependency between the OutputSpecification and the Payment Mechanism. Itis important, therefore, that these aredeveloped in conjunction.
Understanding the Payment Mechanism
48 The majority of those interviewed had readand understood the Payment Mechanism.Where this was not the case, it was generallybecause the respondent was a user ratherthan contract manager.
We asked individuals “Have you as anindividual read and understood the PaymentMechanism/payment arrangements for thisproject?”
49 Whilst the Payment Mechanism is sometimesviewed as ‘inaccessible’, and a documentdrawn up by the financial and legal advisors tothe project, it is important that key personneland stakeholders involved in the projectunderstand the key principles of the PaymentMechanism.
RecommendationIt is essential to ensure that key personnel arefamiliar with the principles of the PaymentMechanism, and how the Service Provider isrecompensed for the contracted services.
Performance monitoring
50 Given the predominance of performancemonitoring requirements in local governmentover the previous decade, it was not surprisingto see emphasis placed on performancetargets in the development of projects.
Yes
No
No response /
Non-applicable
5%
80%
15%
12
51 Monitoring processes generally include theproduction of a monthly monitoring report bythe Service Provider which includes a requestfor payment of the unitary charge based onthe Payment Mechanism. Often this reportforms the basis for a monthly Local Authorityand Service Provider meeting to discuss thecontent of the monitoring report and anyissues arising, such as under-performance andpotential payment deductions.
52 In the majority of the schemes in this review,performance monitoring reports were beingprepared by Service Providers, and the reportsprovided sufficient information to monitorperformance adequately, and determine thenecessary payment. In some instances it hasbeen necessary for the Local Authority andService Provider to work together to developthe performance monitoring arrangementsfurther to ensure that the necessaryperformance monitoring information is beingprovided.
We asked individuals “Are monitoring reportsbeing prepared by the Service Provider andassessed by the Local Authority for eachpayment period?”
We asked individuals “Do you or have youreceived Performance Monitoring reportsfrom the Service Provider in accordance withthe contract?”
We asked individuals “Do the monitoringreports provide sufficient analysis to enablepayments to be accurately computed?”
RecommendationAppropriate effort needs to be given to thedevelopment of the performance monitoringregime during the procurement process;getting this right at an early stage willfacilitate better long-term relationships, andensure consistency and clarity in theperformance monitoring regime.
Yes
No
No response /
Non-applicable
Yes
No
No response /
Non-applicable
Yes
No
No response /
Non-applicable
5%
85%
10%
5%
84%
11%
5%
84%
11%
13
53 Generally, all parties agreed that the LocalAuthority had sufficient expertise in place tomanage the Contract. This point wasreinforced when the Service Providers wereasked whether they considered that LocalAuthorities had the right managementstructures to manage the new partnershipcontracts. In almost all cases the response wasyes.
54 Many of the schemes reviewed hadexperienced a change of personnelresponsible for the monitoring of thecontracted services; this was an issue for bothLocal Authorities and Service Providers.
RecommendationIt is important that there are appropriatetransition arrangements, ensuring continuityand transfer of knowledge. Local Authoritiesand Service Providers need to ensure thatthere is adequate succession planning tomaintain stability in the partnership.
55 Few Local Authorities had used formaltraining methods for their contractmanagement staff: they were very confidentthat they had sufficient expertise in place andstructures to manage the Contract. This hadbeen achieved through using personnel whohad previously been involved in the PFIprocurement, or who had previous experienceof managing PFI schemes in the LocalAuthority, or another Local Authority.
56 The review findings indicate that LocalAuthorities had in many instances under-estimated the costs of contract management,and the majority of those interviewed hadneeded to increase their level of monitoring.
57 Whilst for some schemes this may reflect thefact that the majority of the monitoring todate has been associated with the build orinvestment period (which typically doesinvolve a higher degree of monitoring), therewas also some evidence to suggest that LocalAuthorities had not in all instances fully
assessed the contract management andperformance monitoring requirements of thePPP/PFI scheme, and had not set asidesufficient resource for contract management.
58 It is important that attention is given to thelong-term management issues at theprocurement stage, including developingpartnership relationships, knowledge transfer(from the procurement team to the contractmanagement team), mutual understandingand trust.
Effectiveness of the paymentarrangements
59 Performance deductions under the Contractsvaried, with minimal or zero deductions beingmade in some schemes; in others, deductionswere being made for sub-standardperformance. In general, those Contracts witha greater technical or engineering elementhad made more regular deductions; thisappeared to reflect the fact that contractmanagement in the technical and engineeringservice areas is more established, and that thepersonnel involved are more comfortable withcontact management. The more ‘technical’areas may also benefit from more objectivityin defining the service requirements.
60 There appear to be different approaches tothe operation of the Payment Mechanism bydifferent Local Authorities, some taking amore contractual approach than others.Several Local Authorities had never imposeddeductions even though circumstances wouldjustify them.
61 A number of Local Authority representativesstated that deductions were not being madein accordance with the Payment Mechanism,or they noted that the Output Specification orPayment Mechanism did not adequately coverall of the services now required from theService Provider.
14
We asked individuals “Have or are financialdeductions being made in accordance withthe Payment Mechanism or paymentarrangements?”
We asked individuals “Have or are servicepoints/performance points/penalty pointsbeing awarded in accordance with thePayment Mechanism/paymentarrangements?”
We asked individuals “In your view, is thePayment Mechanism working?”
62 The 4ps review highlighted the question ofhow effectiveness is defined in the context ofa partnership. The most widely held view isthat the Payment Mechanism is there toincentivise performance, and the LocalAuthority should only pay for the services ifthose services are in line with the servicesspecified. However, other views wereexpressed that the ‘spirit of a partnership’ isabout service improvement and that this willnot be achieved through penalising a ServiceProvider.
63 It was apparent that the desire to work in apartnering context had also led to someinstances where the Local Authority was notenforcing the performance regime set out inthe Contract. Examples were identified ofService Providers delivering a sub-standardperformance, but suggesting that the LocalAuthority should ‘sympathise with us’. 4psbelieves that this latter view potentially blursrisk and responsibility.
We asked individuals “How do you view thePayment Mechanism: is it seen as a means of‘punishing’ the Service Provider?”
Yes
No
No response /
Non-applicable
Yes
No
No response /
Non-applicable
Yes
No
No response /
Non-applicable
5%
77%
18%
8%
76%
16%
5%
82%
13%
37%
63%
Yes
No
15
We asked individuals “Do you believe the levelof payment made in each period reflects thebenefit delivered?”
64 The benefits of being able to incentiviseperformance through the PaymentMechanism were acknowledged on morethan one occasion.
Director, Service Provider“I have to report the status of this contract to my Board of Directors, who then in turnreport to our shareholders. The desire andexpectation of my fellow directors is that there are no deductions to the unitary chargewe receive due to under-performance.”
“Clearly if there are performance deductions,questions would be asked. To me this provides a clear incentive for us to perform.”
65 4ps believes that over the long-term, the mostsustainable partnerships will be those in whicheach party respects the underlying contractualrequirements, but works in ‘partnership’ toresolve emerging difficulties and seekcontinuous improvement; achieving this‘middle ground’ remains a challenge in somesectors.
RecommendationImprovements are needed to the developmentof the Output Specification, PaymentMechanism and performance monitoringregime in some sectors. As part of this, theperformance regime needs to be properlythought out and tested, with the clear aimthat once operational the performance regimeand Payment Mechanism will be applied. 4pswill also address this as part of the updating ofits sector specific procurement packs.
The Help Desk
66 Many Service Providers have in place a ‘helpdesk’, customer care system or ‘call centre’ tohandle queries from the Local Authority ormembers of the public who are specifying thatthere is a performance failure. The help deskprovides a single point of contact forenquiries, and can provide valuable assuranceto customers.
67 Help desk facilities were available to nearly allof the projects reviewed. It was evident thatthe help desk facilities are working extremelywell, and only a very small number of thesehad experienced problems.
We asked individuals “Are you aware of a fullyoperational help desk being available?”
5%
79%
16%Yes
No
No response /
Non-applicable
Yes
No
No response /
Non-applicable
5%
89%
6%
16
4. The Contract
68 The Contract sets out the terms of theagreement between the Local Authority andthe Service Provider for the contractedservices. The Contract is intended to enableLocal Authorities to strike a balancedcontractual position that is commerciallydeliverable for the Service Provider and canprovide value for money for the LocalAuthority.
Understanding the Contract
69 The majority of those interviewed had readand understood the PFI Contract. Where thiswas not the case, the respondent was aservice user of the facilities and did not needto understand the Contract.
We asked individuals “Have you as anindividual read and understood the fullContract documentation?”
The role of the Contract
70 Some Local Authorities had recourse to theContract during the operational phase; othershad not looked at the Contract since financialclose. Whilst there was some evidence tosuggest that this reflected the ‘partnering’nature of some of the schemes, it was alsoapparent that the desire to work in apartnering context had led to some instanceswhere the Local Authority was not enforcingthe contractual obligations.
71 Some three-quarters of the projects reviewedreferred to some form of Partnering Boardestablished to manage the partnership from astrategic perspective. This Board would meetmonthly or quarterly and would seek,amongst other things, to deal with anycontractual disputes in advance of triggeringdispute resolutions in the Contract; to monitorthe Contract and service delivery strategically;and to encourage effective communication atall levels within the partnership. 4ps review ofoperational projects indicates that thePartnering Boards are working very effectively.
72 The involvement of equity/ funding partners inthis arrangement was also noted as a benefitto partnership working.
Director of Service, Local Authority“I really have found the ability to turn toequity investors and financiers in the SPV weare working with as a very valuablemechanism to ensure performance standardsare met. It’s a good mechanism to have at ourdisposal.”
“This is not to say that I am picking up thephone constantly to talk with them, becausethat is not the case; but we have had someproblems with the performance of our ServiceProvider, which has meant that their unitarycharge payment is at risk, and in fact we havemade deductions recently due to consistentunder-performance.”
“The ability to discuss these issues with thewider SPV partnership has proven very useful.I don’t want to make deductions, in fact farfrom it, but equally I am not going to accept abelow-par service. We are very proud of thisnew facility for our community.”
Yes
No
No response /
Non-applicable
5%
79%
16%
17
We asked individuals “Has the Local Authorityhad to refer to the Contract on any issue?”
73 A number of individuals stated that there hadbeen interpretation issues with the Contractdocumentation, with a number of ServiceProviders and Local Authorities being unsureas to the meaning of certain statements. Thisappears to have resulted in a number ofqueries relating to risk transfer, and thevalidity of payment deductions.
RecommendationAppropriate ‘challenge’ should be undertakenon Contract drafting at the procurementstage, and due consideration given topotential service evolution and development.
Contract flexibility
74 A number of changes post implementationhad been made to the Contracts for theschemes reviewed.
We asked individuals “Has your organisationnegotiated any changes to the contract postFinancial Close?”
75 Many of those interviewed had been happy toagree verbally to changes in approach duringthe operational period, and the 4ps believethis demonstrates that the principles ofpartnering are working.
76 Where they did occur, variations to theContract had generally been time-consuming,typically involving weeks of discussion beforea position satisfactory to both parties wasagreed.
77 Most Local Authorities and Service Providersbelieved that the Contracts in place were‘future proofed’ against legislative change,but some concern was expressed that theContracts did not offer sufficient flexibility(about one-third of those interviewed believedthat the Contract negotiated did not offersufficient flexibility).
We asked individuals “Do you believe that theContract as negotiated offers sufficientflexibility in the provision of services?”
78 In the majority of the schemes reviewed,benchmarking and market testing had notbeen used by either the Local Authority orService Provider in the provision of thecontracted services. This was in the main areflection of the Contracts not having reachedthe first benchmarking date. In almost allcases, those interviewed referred to provisionsin the Contract which commit to eitherbenchmarking and/or market testing in thenear future, at say 3, 5, or 7 years into theContract.
Yes
No
No response /
Non-applicable
5%
61%
34%
Yes
No
No response /
Non-applicable
5%
32%
63%
Yes
No
No response /
Non-applicable
5%
64%
31%
RecommendationThere appears to be the opportunity forimprovement in the Contract drafting inrelation to variations to the Contract. This willbe looked at as part of the development bythe 4ps of sector-specific Contracts.
Where changes are made, it is important thatthese are properly documented in thecontractual documentation.
79 4ps believes that benchmarking could becomea contentious issue when it arises. Drafting inthe Contract will therefore need to be robust.
80 In some cases price changes in the marketwere putting pressure on Service Providers,and they reported that some Contracts werenot as profitable as they had anticipated,perhaps reflecting the initial ‘competitive’pricing. In a number of instances this had ledto protracted discussions regarding variationsto the Contract.
Contract clarification
81 A number of the schemes reviewed hadexperienced some form of Contract‘clarification’. Some of the reasons quotedincluded the following:
• Degree of design input• Planning and site condition delays• Cost of variations• How to deal with regulatory change.
82 None of these clarification issues went to‘dispute resolution procedure’, and insteadwere satisfactorily resolved by discussion,typically at the Partnering Board level.
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For further information contact 4ps at
4psSouth EntranceArtillery HouseArtillery RowLondon SW1P 1RT
Tel 020 7808 1470Fax 020 7808 [email protected]
4ps is local government’s project delivery specialist. 4psworks in partnership with all local authorities to securefunding and accelerate the development, procurement andimplementation of PFI schemes, public private partnerships,complex projects and programmes. 4ps’ multidisciplinaryteam provides hands-on project support, gateway reviews,skills development and best-practice know-how.
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