Written evidence submitted by the Specialist
Engineering Contractors' Group
THE SPECIALIST
ENGINEERING CONTRACTORS'
(SEC) GROUP
1. SEC Group represents the specialist engineering
sector which accounts for up to 40% of the work done on many PFI
projects and facilities. SEC Group is an umbrella body for six
of the construction industry's premier trade associations.
Association of Plumbing and Heating Contractors
British Constructional Steelwork Association
Electrical Contractors' Association
Heating and Ventilating Contractors' Association
Lift and Escalator Industry Association
SELECT (Electrical Contractors' Association for Scotland).
Together these organisations act on behalf of a sector
comprising over 60,000 firms and a workforce of more than 300,000.
They account for the largest single component (by value) of construction
output. Further information is available on the SEC Group website—
www.secgroup.org.uk.
WEAKNESSES IN
THE PFI PROCUREMENT
METHOD
2. The primary driver in the development of the
PFI model for delivering public assets has been the transfer of
risk from the public sector to the private sector. In practice
much of the private sector risk has been transferred to the firms
in the construction supply chain delivering the asset or facility.
Many of these firms are unable to accommodate the risks passed
down to them either because of size and/or levels of capitalisation.
Inappropriate risk allocation does not deliver value for
money.
3. Construction contracts for PFI facilities
are usually let using traditional procurement routes. Traditional
construction procurement does not generally deliver modern
facilities that are sustainable and efficient in respect of energy
use and maintenance. Traditional construction procurement is characterised
by the lack of any buy-in from the supply chain delivering the
asset to decisions on design, risk and cost. Countless reports
have advocated a solution to this which, in summary, requires
that the asset should be delivered by an integrated project team
whose decisions on critical matters - especially design, risk
and cost - should be underwritten by project insurance.
4. It is not proposed to develop this since the
ground has already been covered in the various reports. Reference
should be made to Re-thinking Construction (Sir John Egan,
1998); Improving Public Services through better construction
(NAO, March 2005) and Construction matters (House of Commons
Business and Enterprise Select Committee, 2008).
However we invite the Treasury Select Committee to
recommend as follows:
There should only be financial close on pfi projects
when it is demonstrated that the construction of the facility
will be undertaken by integrated project teams. furthermore the
government should require departments to nominate pfi projects
that are suitable to pilot project insurance that will underwrite
the cost plan agreed by the team.
5. We have already made reference to the fact
that there is inappropriate risk allocation in supply chain construction
contracts on PFI projects. A major problem for construction firms
in the supply chain is payment abuse such as lengthy payment periods
and spurious grounds given for not discharging payments. We, therefore,
invite the Treasury Select Committee to make two further recommendations:
(a) All supply chain construction/maintenance
contracts to be let using nec forms of contracts.[95]
these should be unamended with the exception of the "z clauses"
permitted by the cabinet office dealing with matters such as confidentiality
and security.
(b) All supply chain payments on pfi construction
contracts, maintenance and facilities management contracts should
be made through a project bank account. (The remaining part of
this submission explains in rather more detail the concept of
project bank accounts).
The House of Commons Business and Enterprise Committee's
'Construction matters' Report of July 2008 stated that 'both the
Office of Government Commerce and the National Audit Office have
endorsed the use of project bank accounts as a means of improving
payment practices and facilitating integrated working.
Central government procurers should now start to make use of project
bank accounts, where practicable and cost-effective. The OGC should
monitor take-up and evaluate benefits'.
In November 2010 the Cabinet Office recommended that
public sector procurers should move towards the use of PBAs "unless
there were compelling reasons not to do so".
6. PROJECT BANK
ACCOUNTS
The use of PBAs will establish a fair and transparent
payment system which ensures that those firms delivering and managing
the facility receive prompt payment for monies that are rightfully
due to them through the payment mechanism in their contracts.
The account could be, initially, set up by the Special Purpose
Vehicle. The account should be ring-fenced through a trust deed
and all authorised payments should be made directly by the bank
to members of the supply chain delivering and managing the facility.[96]
With the money held independently in trust by the
bank as a third party, there is increased transparency over cash
flow. One can see exactly when and to whom monies are being transferred
to. This gives assurance to the team that payments will be made
promptly, thereby improving trust and collaboration (leading to
fewer disputes, better value for money and increased productivity)
and resulting in further savings over time through reduced overheads
associated with debt collection and administration. In addition
their use should, in theory at least, avoid the need for parties
to price for insolvency risk, thereby providing a further cost
benefit. A major advantage of project bank accounts is that the
supply chain is protected from insolvency of firms higher up the
chain since the monies, as trust monies, are not available to
creditors; in the event of an upstream insolvency payments can
still be made to the supply chain directly from the bank account.
7. BENEFITS AND
SAVINGS ARISING
FROM THE
USE OF
PBAS
The Government estimates savings of up to 2½%
on project costs through using PBAs. As already mentioned PBAs
will promote a culture of collaboration and trust along the supply
chain delivering and managing PFI facilities which, in turn, helps
to create greater efficiencies.
8. CONTRACTS
PROVIDING FOR
PBAS
The industry's standard forms provide for PBAs. The
NEC has published a project bank account Z clause.
9. USE OF
PBAS
Crossrail—the largest construction project
in Europe - has confirmed that it is using PBAs. The Defence Infrastructure
Organisation (DIO) has announced that PBAs will be used on all
their construction contracts from 2013 when work starts using
the Next Generation Estate Contracts. A recent example was the
redevelopment of RAD Wyton, the Midlands Medical Accommodation
project in Lichfield. DIO expects to spend around £500m a
year on housing for the services, training estate, and regional
facilities under its new regional and national capital works frameworks.
The highways agency has also used project bank accounts.
therefore there is already considerable experience in using accounts
in the construction industry.
May 2011
95 NEC refers to the Engineering and Construction Contract
(and related contracts) published by Thomas Telford. The Cabinet
Office considers that NEC contracts offer value for money since
they require pro-active and efficient project management. NEC
contracts were used by the Olympic Delivery Authority and are
now being used by Crossrail. Back
96
Barclays Bank, Bank of Scotland and HSBC have PBA documentation
such as trust deeds and bank mandates. Back
| 
