Private Finance Initiative - Treasury Contents


Written evidence submitted by Kent Police

1.  EXECUTIVE SUMMARY

1.1  PFI projects, when compared to traditional "design and build" procurement methodology for estate provision, are cost effective and deliver Value for Money. Providing the costings and comparisons are done on a "Like for Like" basis including furniture, fixtures, fittings, outsourced services, and all associated Lifecycle and maintenance costs (where included in a PFI proposal/contract) there is very little, if any, cost variation if projected over a PFI contract period.

1.2  Authorities need to be clear as to the specification of their Requirements in terms of building/facility/service needs. The original methodology of leaving this to the private sector did not work and, without a doubt, was the cause of many of the PFI issues. The contract must be supported by a strong but fair Payment Mechanism to deal with delivery failures. Furthermore, Authorities need to have in place strong Contract Management provision with staff who understand the contract and are prepared to "challenge" providers over poor performance/non compliance and ensure relevant financial deductions to charge payments are realised having due regard to potential costs of such a "challenge" and the benefits of a "commercial settlement" where appropriate. This ensures facilities are delivered and maintained to the required standard along with the specified service delivery. This way good quality buildings and services are provided and maintained.

1.3  However, early PFI projects suffer from poor national/central guidance and there is probably very little that can be done about these. Over more recent times the guidance has improved with experience and knowledge gained but the current SOPC4 guidance still appears biased towards the private sector. Should PFI continue this requires a radical overhaul making better use of the knowledge and experience gained through delivering PFI projects currently available across the public sector.

1.4  To assist authorities in the delivery of PFI projects central government needs to move away from a position of "protecting the image of PFI" experienced over recent years, to one of supporting authorities to challenge the private sector provision where such provision is below the required standard. Government also need to respond and challenge misleading media coverage of the PFI.

1.5  Those PFI contractors that have a reputation for providing quality should be able to capitalise on this whilst those that have gained a poor reputation should not. To this end consideration should be given to the establishment of a national database identifying good providers (may be sector specific), including the individual companies that make up an SPV. If these companies/organisations were then the "preferred suppliers" this would act as an incentive on all PFI providers that wish to remain in the sector to deliver good service for inclusion on the database.

2.  INTRODUCTION ABOUT SUBMITTER

2.1  Kent Police/Kent Police Authority has two PFI projects for new police stations at Gillingham (Medway Police Station) and Northfleet (North Kent Police Station) the contracts being signed in July 2004 and 2006 respectively with different "Providers". The experiences are completely different with one having had numerous disputes and construction completed nine months late whilst the other went exceptionally well, construction being completed on time and no significant subsequent service delivery issues.

2.2  Overall contract management is provided centrally with localised day-to-day management/supervision including of contractors performance. This means expert advice and guidance is always available to support local staff and delivers corporacy. This model ensures strong management with an "independent overview" whereby non-compliance matters are identified with appropriate timely action being implemented.

2.3  The submitter is the central PFI Manager/Advisor for both projects with a number of years PFI experience. As such, the submitter now has extensive PFI experience including contract management, dispute and legal procedures.

2.4  This submission covers the PFI perspective rather than the wider procurement domain.

3.  FACTUAL INFORMATION

3.1  Main Strengths:

3.1.1  Capital sums do not have to be identified along with financing arrangements.

3.1.2  As contracts include maintenance of buildings, fixtures and fittings with all being "lifecycled" budget expenditure can be projected over the lifetime of the project avoiding "peaks and troughs".

3.1.3  Good quality buildings are provided and generally the facilities are well managed and maintained owing to contractual financial implications if not. This is in distinct contrast to the quality of public sector buildings procured pre or outside of the PFI.

3.1.4  PFI projects are no more expensive to local authorities than a traditional "Design and Build" contract if costed on a "like for like" basis. In general Design and Build does not include building maintenance, furniture, fixtures and fittings with "lifecycle" costs and "outsourcing "of certain functions. Further cost savings are achieved by the public sector through not having to employ people for estate management. PFIs deliver Value for Money.

3.1.5  Strong contract management by Authorities ensures delivery of contracted services with financial deductions from the monthly Unitary Charge where the service provision is not up to standard increasing the VfM of PFI projects.

3.1.6  Risk Transfer of costs in relation to facility/services provision over the lifetime of the project avoiding unforeseen and significant expenditure for local authorities.

3.1.7  During the service delivery stage managers see the long-term financial implications of estate provision/management proposals (traditionally the "hidden costs" which are now available) making managers better informed and more accountable for their decisions avoiding them being made on a "spur of the moment" basis and incurring unnecessary expenditure. From an operational managers perspective this is not necessarily liked but from a business and VfM perspective should be regarded as "good practice".

3.1.8  The Government grant to local authorities makes PFI, from a local perspective, the most cost effective method of procurement to use.

3.1.9  During the early stages of service delivery of a PFI contract the cost of carrying out Variations (works, etc) always appears very high at first view. However, if one takes in to account the Lifecycle charges and "market tests" often the PFI route is cheaper than traditional procurement over the remaining contract lifespan owing to the buying power of some PFI providers. However, most PFI providers are smaller than "Police UK" or, indeed, the public sector, begging the question why the public sector is not maximising its buying potential across the board?

3.2  Main Weaknesses:

3.2.1  Too much reliance placed on private sector to identify public sector needs and solutions in early PFI projects leading to poor design and contracts. Undoubtedly this has led to subsequent horror stories regarding the PFI.

3.2.2  The requirement to follow national guidance, which was not good in relation to early PFI projects, once again lead to poor design and contracts. Even now the latest SOPC4 guidance, although better, still appears to be biased towards the private sector and does not appear to take in to account the wealth of knowledge and experience that now exists within the public sector. This guidance, if PFI is to continue, needs updating reflecting more of the needs and requirements of the customer rather than the provider.

3.2.3  The process for securing PFI Credits is bureaucratic making it too long and rather expensive for local authorities (and probably providers). This has to be streamlined.

3.2.4  Historically some Government departments have been more interested in protecting the image of PFI rather than supporting Authorities to challenge poor provision.

3.2.5  The "Adjudication Process" for disputes defies the traditional rules of justice and either needs a radical overhaul or omission from the PFI dispute processes.

3.2.6  Information on good and bad providers is not available nationally yet the information is out there. This leads to bad providers still being awarded contracts. The provision of a national database on how providers perform would not only avoid further contracts being given to such bad performing organisations (and a repeat of the same problems) but it would also put pressure on providers to ensure they deliver a good product and services.

3.2.7  Lack of Government support to counteract misleading media articles regarding the PFI.

3.2.8  Lack of flexibility in budgets. Traditionally, at times of economic stress, such items as estates maintenance are usually amongst the first matters to suffer financially. Under a PFI project, this cannot be achieved. Of course, this is also a significant strength as it ensures the public investment is protected improving VfM, leading to public buildings always being maintained to a high standard, protecting the public investment.

4.  PFI DEBT "ON" BALANCE SHEET

4.1  This question is somewhat academic now as PFIs are required to be shown "on" balance sheet. However, from an Authority perspective whether the debt is "on" or "off" balance sheet makes very little difference as to whether the PFI route for procurement would be followed or not. It is acknowledged the procedures for showing "on" balance sheet are somewhat complex but have always been available.

4.2  It is further acknowledged that from a Government perspective there may be some small advantages to PFI projects not being shown "on" the balance sheet.

5.  RISK TRANSFER

5.1  Providing the Authority Requirements are clear, whether construction/facility needs or service delivery, and supported by a robust and fair Payment Mechanism then the transfer of risk for compliance with those Requirements is sound and achievable if good quality contract management is employed by Authorities.

5.2  The PFI providers to Kent Police Authority are constantly reminded that compliance with the Authority Requirements remains the risk of the Contractor.

5.3  The "risk transfer" includes the delivery of policing services where those services have been transferred to the PFI provider for delivery (Public Counter/Enquiries; Lost/Found/Seized Property Management; Logistical services; etc).

5.4  All non-core policing activity (Custody management; office functions; Crime Scene/Forensic Investigation; etc) delivered from a PFI building could be suitable to be outsourced to a PFI provider. The only functions that need to remain "in house" are those where a "Warrant" is required to deliver them. With the transfer of the functions would go the "risk" with tight performance criteria against which to perform. However, if there were a desire to outsource such functions across a police force area then the PFI route is probably not the preferred option for a number of reasons including complications caused to police financing v Government PFI grant. The "PFI "Good Practice" of having tight performance requirements to be delivered and the financial consequences if not met is a robust model to take forward in to "outsourcing" in general outside of the PFI domain along with the lesson some authorities have had to learn - such contracts require good contract management.

6.  STATE GUARANTEES

6.1  PFI providers generally see the investment in the public sector as "safe" although "long term" with returns on the investment as being acceptable rather than outstanding. This has become more apparent during the current financial situation.

6.2  From an authority perspective, it assures good quality public buildings maintained to a high standard, thus protecting the public investment which, in view of the Government PFI grant, is affordable, notwithstanding, in real terms, this reduces over the contract period, but by a known amount, making budgets manageable. It is implied this Grant is guaranteed for the contract lifetime. If it were taken away then it would create severe financial issues for many authorities.

7.  SUITABILITY FOR DELIVERY OF SERVICES

7.1  Only having experience of delivering PFI projects within the police environment and building related, this element is based upon those experiences;

7.2  In essence any services required to be delivered within such an environment can be incorporated under a PFI (other than those where a Warrant is required, namely police officers). However, as PFIs operate under a performance culture, to ensure delivery of services and incentivise performance, the roles must be able to demonstrate measurable outputs/outcomes in order to ensure VfM. The potential is, therefore, very wide with the determining factor being VfM and affordability.

April 2011


 
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Prepared 10 August 2011