Written evidence submitted by Andrew Barrie,
Vice President Operations and Jon Mitchell, Development Director,
KBR International Government & Defence |
1.1 As a large organisation which participates
in major project delivery in several business sectors, KBR can
give evidence of the value for money benefits of PFI where cost
and risk considerations have driven key decisions in the design
of the solution and adoption of new practices in the interest
of reduced whole life cost. However, the authors consider that
a major determinant of success or failure of any project is the
quality and experience of the project leadership (both client
and contractor) and that this is not currently receiving sufficient
focus. We consider that PFI should have a firm place as a useful
and effective procurement model in appropriate circumstances but
that especially in the current period of severe fiscal constraint
the government should place greater emphasis on project leadership
and also actively promote the use of alternative procurement models
such as financially incentivised collaborative alliance contracting.
1.2 We consider that the driver for selection
of appropriate procurement routes should be to optimise risk transfer,
recognising that different procurement models will impact on initial
contract value as well as the risk adjusted outturn forecastie
risk transfer may come with an initial price premium.
2.1 This memorandum is submitted by Andrew Barrie
and Jon Mitchell of KBR International Government & Defence.
The authors both have broad experience of project and operations
management spanning defence, government, transport utilities,
hydrocarbons and other commercial sectors, including in particular
the negotiation and execution of a number of major PFI projects.
2.2 KBR is a leading engineering, procurement
and construction company with more than 35,000 employees in 45
countries on five continents and offering a range of services
through ten business units: Downstream, Gas Monetization, Infrastructure
& Minerals, International Government & Defence, North
American Government & Defense, Oil & Gas, Power &
Industrial, Services, Technology & Ventures.
2.3 KBR is currently delivering Private Finance
Initiative (PFI) and Design Build Fund & Operate (DBFO) projects
in many sectors such as the Heavy Equipment Transporter and (in
joint ventures) Project Allenby Connaught, the 1420 km Alice Springs-Darwin
railway, several road projects in the UK and the N8 in Southern
Ireland. KBR has also provided technical consultancy advice for
3. What are the strengths and weaknesses of
different public procurement methods?
3.1 Our perception is that Government contracting
agencies can tend to follow a mantra that "outsourcing is
more efficient and industry is better at managing risk" but
then fail to give sufficient care and attention to structuring
the procurement in order to optimise the transfer of risk. Contractors
are of course unlikely to challenge those areas where the contracting
authority has retained inappropriate risk.
3.2 In the hydrocarbons and utility sectors we
observe a two way flow of senior personnel moving between client
and contractor organisations and we see this as a healthy indicator
of the intelligence of the sector in procuring and delivering
major projects. On the other hand we see comparatively little
interchange of senior project and commercial personnel between
major contractors and public contracting authorities. This division
into two resource pools together with the "arms length"
separation between industry and public bodies that is being driven
by public procurement processes is in our view having detrimental
effects on project outcomes. Poachers often make the best gamekeepers
and vice versa.
3.3 While the choice of the procurement method
is important, it is our experience that the quality of project
leaders and managers in the client organisation and the supply
chain organisations a significant factor in determining whether
a project succeeds or fails. We suggest that too little emphasis
is currently being placed on the capability and experience of
project leadership; (a) by the contracting authority when establishing
its project team, (b) by project teams when selecting the supply
chain and finally (c) in the integration of the project delivery
3.4 In commenting on different public procurement
methods below we have obviously focussed on those which seek material
transfer of risk. There is, of course, a very small class of projects
where it is appropriate for contracting authorities to self perform
the management and accept risk but these models have not been
3.5 PFI models
3.5.1 In the search to reduce cost and/or reduce
risk in a competitively tendered PFI environment there is no doubt
that designs and solutions differ from those produced through
other procurement routes. We can cite many examples from KBR PFI
& DBFO projects (eg bridge deck design, pavement design, buildings
design, general scheme rationalisation, development of a supply
chain strategy, selection of materials and the introduction of
enhanced condition-based maintenance strategies) where new solutions
have been used and/or current solutions have been improved or
developed in the interest of lower whole life cost.
3.5.2 It is recognised that PFI has driven industry
to develop much greater knowledge and understanding of operating
and maintenance costs. BRE and other studies demonstrate that
knowledge of lifecycle costs is greatest in sectors where PFI
has been most extensively used (eg healthcare), confirming that
PFI has and is adding value.
3.5.3 A common criticism of PFI is inflexibility
however we can point to examples such as Heavy Equipment Transporter
and Project Allenby Connaught where the contracting Authority
properly foresaw the need for flexibility. Appropriate mechanisms
were built in to the concession agreements in order to accommodate
significant variability in utilisation levels, collaborative development
of detailed elements of the solution and provide much additional
transparency in pricing data which has and will continue to facilitate
the effective pricing of change and deliver enhanced value for
3.5.4 PFI is denigrated (by the press and less
well informed) for the high cost of change and any additional
services. We wholly endorse the view expressed by Dr Tim Stone
of KPMG in his memorandum on PFI procurement to the Economic Affairs
Committee where he noted that costs of late changes are often
and quite appropriately material but that under other procurement
methods such costs are rather easier to bury.
3.5.5 A weakness of PFI can be the time &
high cost of the procurement phase itself and this may be significantly
exacerbated by poorly managed Competitive Dialogue and any lack
of data or general uncertainty around the requirement. This is
a factor which must be considered and managed but should not in
our view rule out the method.
3.6 Turnkey or EPC models, potentially with two
3.6.1 Turnkey or EPC models provide for effective
transfer of cost, delay and some aspects of performance risk and
but pay little heed to issues associated with through life cost
and will not lead to optimised solutions. We view this as a material
3.6.2 Two stage contractor appointments are becoming
the dominant route in the private sector. Initial selection is
focused on the competencies and skills of the contractor's team
and the price for the capital works is then developed in collaboration
with the client, which in turn leads to much closer integration
of the overall project team and tangible benefits in quality,
cost and time.
3.6.3 Such routes are in no way ruled out by
the EU Procurement Directive or SI 2006 No 5 however we observe
that few public contracting authorities focus on selection of
the design and delivery team and instead revert to capital cost
estimates as the principle method of selection. We believe this
hesitancy should be challenged very robustly.
3.7 Alliance models with gainshare/painshare
3.7.1 The private and utility sectors have had
considerable success in the use of incentivised alliance procurement
models (eg Scottish Water, Southern Water) in which client and
contractor sign up to a target cost at an early stage and thereafter
adopt this as the basis for common financial incentive structure,
sharing the gain or pain of the final outcome by formula. Whilst
there have been a number of defence projects which have been procured
through hybrids of this model ( eg CVF Carrier project, Surface
Ships Alliance, MBDA Complex Weapons, D154 Devonport) our view
is that the outcomes have not always been optimal.
3.7.2 Having reviewed KBR's long track record
in incentivised alliances (which dates back to the North Sea offshore
developments of the 1990s) we have drawn two key conclusions which
may in part explain why the alliance route has not yet had the
success one might expect in public works and services:
noted above, success is often related to the capability and effectiveness
of leadership and focus on successful integration of the project
incentivised alliance model has been most powerful where the 'business
as normal' cost base is well understood and the driver is major
cost reductions. The dramatic fall in oil prices spawned the use
of alliances in the North Sea and it is widely recognised that
that savings in the capital cost of delivery of between 15% and
20% were normal and repeatable. The alliance models adopted by
most clients provided a vehicle for delivering transformational
change, although it may not be so well suited to "first of
type" projects where there is material uncertainty in the
calculation of a target cost.
3.7.3 The ability of incentivised alliance models
to deliver transformational change and major cost savings resonates
very loudly in current times of post CSR/SDSR austerity measures.
We encourage the Committee to ensure these options are properly
considered as an alternative to PFI on appropriate projects.
3.8.1 While KBR has no Local Asset Backed Vehicle
(LABV) projects currently in its portfolio, we have undertaken
detailed investigations of various LABV models and consider them
to be an attractive option for outsourcing of non core activities
of government departments. It is our view that LABVs have the
potential to integrate many of the best of elements of the Alliance
and PFI contracting models:
a business management perspective where contracting authority
and contractor work together to a common goal rather than creating
an adversarial contracting environment.
a robust and balanced governance framework based around articles
of association of a joint venture and the well developed rigour
of a board of directors.
capital investment from private sources - but subject to proper
the lengthy procurement periods and start up costs of PFI models.
a business relationship that can cope with a changing and dynamic
4. If PFI debt had been on-balance sheet rather
than off-balance sheet would PFI projects have been used as much?
How should PFI deals be accounted for?
4.1 We can only comment upon those projects which
KBR has either bid or ultimately won and in this context we are
confident that all of our PFI projects would have proceeded, regardless
of the accounting methodology. We are, however, aware of projects
which we consider were suitable for consideration as PFI projects
but where the client subsequently reverted to a more traditional
procurement route and sense in some cases a subjective reaction
to the complexity of PFI procurement and concern about the on/off
balance sheet issue.
4.2 It is our view that accounting rules should
not unduly influence the selection of procurement routes. PFI
saves money by driving more carefully considered and cost effective
solutions however transferring risk to the private sector inevitably
carries a price. Dependant upon the project and the contracting
authority, we hold the view that the price premium for risk transfer
can and does still represent good value for money.
4.3 We are not well placed to express views on
the matter of controlling public sector borrowing and how debt
funded PFI projects should be treated in this context, save to
note the vital importance of maintaining adequate investment in
infrastructure during the next decade of fiscal constraint.
5. How far can risk really be transferred
from the public to the private sector?
5.1 We would propose a different perspective
on this question and ask the Committee to reflect upon how much
and how far could the private sector contribute to the management
of public sector's risks, which we believe is substantially more
than is achieved at present.
5.2 PFI has proven to be an effective vehicle
for the transfer of delivery and operation risk to the private
sector. Project audits have demonstrated much greater certainty
of timely delivery, increased customer focus and success in transferring
risk associated with the cost of construction and operation. The
contracting authority nevertheless retains some key risks such
as lack of future flexibility, changes in legislation, future
sale of consortium members and increased service demand.
5.3 As discussed above, PFI is but one of a number
of models which can achieve effective transfer of risk, but no
public procurement method will relieve the contracting authority
completely. Each method has its own distinctive 'fingerprint'
of risk transfer. It is therefore up to the contracting authority
to determine which procurement method and which "fingerprint"
best suits the particular project and the contracting authority's
6. Are there particular kinds of risk which
are particularly appropriate for transfer through PFI deals, or
particular projects which are suited for PFI?
6.1 As noted above, PFI has proven extremely
effective in transferring delivery risk and cost risks in circumstances
where there is a robustly defined and enduring requirement, where
the nature of the project is not novel, and there is a good understanding
of current and future utilisation levels. PFI projects are in
the largest part delivered to time and to budget.
6.2 In our view a contracting authority should
not use the method for the whole of its asset portfolio unless
it is extremely confident that it can manage the potential need
to reduce or indeed enlarge the portfolio in the longer term.
7. What state guarantees are explicit or implicit
in PFI deals?
7.1 Early in the negotiation of Project Allenby
Connaught, the client & contractor teams reached a conclusion
that given the size and scale of the project, failure was not
a realistic option and which should be avoided as far as possible.
The response was to design a concession agreement which, as far
as possible, focussed on rectification and not remedyanticipating
those circumstances which might require either state guarantees
or contractor parent company guarantees and ensuring that the
agreement set out fair and effective mechanics to ensure timely
mitigating action before crisis was reached.
7.2 The contracting authority deserves due credit
for its maturity of approach in this regard and we would hold
that the final solution offers better value as a result.
7.3 In PFI projects, the state should reasonably
provide guarantees for those aspects which it is best able to
(or it alone) can manage, principally its own utilisation of the
asset, and also such matters as war and certain risks associated
with change in legislation.
7.4 We consider that the Committee should give
some thought to customary approaches to insurance of assets in
PFI deals and whether this provides best value for money.
8. In what circumstances are PFI deals suitable
for delivery of services?
7.5 Two of the projects in which KBR is participating
are predominantly service contracts (Heavy Equipment Transporter
and Project Allenby Connaught). We would hold that PFI can be
extremely effective for the delivery of services and suggest that
this view is fully supported not only by the end users but also
by the NAO audits that have been carried out on these projects.
7.6 As touched on above, we would commend that
the Committee gives careful thought to the use of long term business
partnerships (ie GoCo &/or LABV models) as routes to delivering
cost savings for non core activities, such as provision and operation
of training facilities and logistics infrastructure as is used
by the armed forces, police and other emergency services.
9.1 It is the view of the authors that the PFI
model has earned itself a firm place in the public procurement
toolkit based on the evidence of successful delivery. It should
not be ruled out because of known issues, which we see as largely
associated with lack of flexibility.
9.2 Notwithstanding, the use of PFI needs to
be considered on a case by case - or project by project basis.
Indeed it would be sound strategy to maintain several solutions
in the toolkit, including turnkey, incentivised alliance and LABV
models and then ensure that each deal is carefully shaped and
structured and the final decision on procurement methodology made
by an experienced commercially competent core team.