MPC0003

Written Evidence submitted by Graham Thomson, CEO, Affinitext

We appreciate the opportunity of being able to respond to the call for evidence to the inquiry on ‘Managing the expiry of PFI contracts’, as follows.

1. Introduction & our reason for submitting evidence

The founders of Affinitext have devoted their professional lives to the efficient delivery and maintenance of quality infrastructure globally: the latest iteration of which is in the implementation of new technology for confidently understanding and managing complex contracts. As PFI projects are amongst the most complex of contractual relationships, we have a strong global footprint in that space:

As such, we have the privilege of working closely with various stakeholders, both public and private, in the delivery of PFI projects, and are passionate about the successful delivery of PFI projects. PFI stakeholders we work closely with in the UK include the Ministry of Defence (Authority), Innisfree (Investor), Engie (FM Provider), HCP (Asset Manager), the Institute for Collaborative Working (NFP Institute), and others.

Through our wide connections, we arranged for video-conference evidence to be given to the NAO by various stakeholders across the spectrum for the purpose of its June 2020 report into ‘Managing the expiry of PFI contracts’.

Indeed, we would like to acknowledge the contribution by the National Audit Office (NAO) in energising an early focus on this important issue.  Much of the NAO’s work is looking backwards after events have occurred and on identifying lessons to be learned from experience. On this occasion, in highlighting an up-coming issue of concern to all stakeholders, the NAO has promoted an early focus of all stakeholders on this issue, which will increase the likelihood of successful PFI expiries / hand-backs.

Similarly, the PACs’ inquiry on this subject hopefully will further increase the likelihood of successful PFI expiries / hand-backs.

Our evidence includes feedback from the various stakeholders we deal with closely.

2. Stakeholders & Common Objective

There is a risk that the issue of PFI expiry can focus too narrowly on the relationship between the Authority and the SPV.  Often the expiry issue is looked at as a zero-sum game between the Authority and the SPV.  As the Inquiry notes, a significant issue of concern is that: ‘While authorities will want to ensure they receive assets in the best possible condition at contract expiry, PFI providers have an incentive to limit spending on maintenance and improvement work in the final years of contracts, as savings can be used to pay higher returns to investors.’

Before narrowing the issue too quickly, however, it is helpful to look across the various stakeholders.  All these stakeholders are important to a successful expiry. On examination, it is seen however that they are usually driven with a single purpose, albeit with some strongly divergent drivers.

Notwithstanding their differing drivers, the key stakeholders relevant to expiry have a strongly aligned interest in seamlessly transitioning the infrastructure and service to a new owner, in whatever form that may be (see section 4. Opportunity, below). A notable aspect of a seamless transition should be ‘no surprises.  There should be no surprises as to asset condition, information being handed over (in both scope & quality), cash flow, contractual and statutory compliance, etc.

While the public narrative in the UK appears to be against the value-for-money proposition offered by PFIs, it is important to acknowledge the emotional investment many of those working on PFIs often have in the quality of the services being delivered to the end-users of those services.

There is a usually a great degree of pride in the assets being managed: the stakeholders involved generally share an enthusiasm to see them maintained in good condition, both leading up to handover and in their legacy beyond. There is much of which to be proud. The recent Infrastructure Partnerships Australia research report on Social Infrastructure PPPs[1] noted that in social infrastructure PPPs in Australia, the service providers (meaning those employees utilising the PPP capital assets to deliver services; such as school principals, doctors, wardens, administrative or management staff) are likely to become committed, and in some cases emotionally attached, to the PPP facility and its service provision. The report found that 95% of those service providers believe that their PPP project has delivered on the service promised by the relevant state government and delivery agency.

The report also found that 82% of those service providers expressed strong appreciation of the quality of services provided by the Facility Management (FM) operator. The satisfaction level with service quality was strongly influenced by the relationship between service providers, contract managers and FM operators. Collaborative working across stakeholders is considered key to the delivery of quality services and will likewise be key to successful PFI expiry.

It would be interesting to see if there was a substantial difference in views if such a study had been conducted in the UK.  With the exception of some well-known issues, there is no reason to think that the same commitment and service does not generally apply in UK PFIs. 

The expiry process should reinforce and support the desire of all stakeholders to achieve the single purpose, as they deal with their diverging drivers.

3. Concurrent Challenges

It is becoming widely accepted that collaboration is key to a successful PFI expiry, and that a collaborative handback process should be developed and appropriately resourced, commencing at least 5-7 years before expiry.  Local Partnerships (LP) believe that contract expiry should be a positive experience.[2] It is recognised, however, that even the best providers and authorities with excellent relationships will need to address a myriad of issues, spanning three concurrent workstreams:

The Scottish Futures Trust (SFT)has released excellent programme guidance on the expiry process, covering each of these workstreams.  The guidance includes the need for early collaborative engagement, on-going contract management, future use, leases, condition surveys, asset and risk registers, O&M documentation, statutory obligations, etc.[3]  Importantly, the SFT makes the valuable point that the participants need to treat the handback process as a project and ensure that appropriate governance and sufficient resources are in place.

And, of course, the Infrastructure & Projects Authority (IPA) is currently resourcing and actively engaging with key stakeholders to ensure that PFI contracts are currently being managed in accordance with their terms, to ensure the taxpayer is obtaining the contracted VfM, while at the same time planning 5‑7 years ahead for a seamless transfer of the assets into a post-PFI operating model, with no business disruption.

It is encouraging that the NAO, IPA, SFT and LP are all focused on the importance of ensuring successful expiries and appear to have a common approach to meeting these concurrent challenges.

An early challenge to be addressed is ensuring that the assets are being well maintained throughout the contract life and are in a good condition. The way this challenge is addressed can dramatically impact the later challenges to be faced. 

Of course, contracts should be managed throughout their life-term to ensure, inter alia, that SLAs and KPIs are being met and the right operational performance and value for money is achieved, but this is especially important as expiry approaches and the assets are due to be handed back. A review at the early stage of the expiry process is a great way of baselining and protecting the service on mutually understood terms, before addressing the challenge of operational and commercial transition. Both Contracting Authorities and PFI Providers should know what it takes to achieve the right performance and commit to one another to sustain that right up until the point of expiry, before addressing the challenge of how to work through exit obligations and manage the transition.

It is important that the contract reviews are done collaboratively between the Authorities and the PFI providers. It is accepted by everyone involved, equity investors, SPVs, OpCos, Authorities and public sector service users that PFI providers should be on top of their contracts and complying with their obligations. A starting point to reviewing the PFI contract is to have an up-to-date version: a single version of the truth for all stakeholders. The NAO notes that the PFI contract is central to preparing for and managing the expiry process and that it can take a considerable amount of time to gather together the PFI contract and all its amendments. Once the up-to-date version of the contract is available, it is important that demonstrating compliance is supported by evidence.

In undertaking the exercise of ensuring contractual compliance, the parties ideally should agree on the purpose of the exercise. Is the prime objective to:

a)      Ensure that the assets are in the condition required by, and being managed in accordance with, the contract; or

b)      Achieve the maximum financial penalties that the Contracting Authority is able to claim?

The answer to this question, which will often be some years ahead of the expiry date, is likely to significantly impact the relationships between the parties. If the process is seen by either party as a means of catching the other out, then a breakdown in relationships is highly likely. For example, the exercise ought not be seen by Authorities as an expedient means of obtaining maximum cash savings on claims relating to trivial operational non-compliance.

Equally, it should not be exploited by PFI providers to compromise service or maintenance for the sake of short-term profit.

Where these things happen, relationships will fail before the really challenging aspects of expiry need to be faced. We know from the NAO review that a third of respondents expect to have to use the Dispute Resolution Process (DRP). The proportion with the fatalistic view that DRP is necessary will only increase if the early onset of the expiry process is characterised by cynicism and mistrust and/or seen as a zero-sum game rather than pursuit of a win-win outcome.

4. Opportunity

PFI expiry gives the assets a new lease of life after being maintained in the condition and for the purpose originally planned 25 years prior.  So much has changed in that time. Do school rooms need to be utilised in the same manner now?  Have demographics changed? How has technology and remote learning impacted usage? What other uses could space be put to?  Similarly, for hospitals, how has patient care changed?  How is the internet of things changing the way in which we understand and efficiently operate services? What initiatives present themselves as part of the commitment to net zero carbon emissions?

Better use of assets post-expiry present exciting opportunities which will need time to explore and procure.  It is important that these questions are dealt with years ahead, so the PFI expiry does not just result in business-as-usual continuation of the services if the assets can be put to better, more efficient use.

5. Risk Management

Risk management principles apply strongly to PFI expiry and should feature in the processes which need to be developed and implemented in the expiry program.

6. Soft Landing Approach

The term ‘soft landing’ exists in some parts of the construction industry and reflects the need for a smooth transition from the design and construction phase to the operational phase of a built asset. It has been embraced in the Government Soft Landing Policy.[4]

It is recommended that a 6-phased, soft landing approach ought to be applied to PFI expiry, as follows:

7. Collaboration

The NAO recognises the importance of a collaborative approach in order to achieve successful expiry.

‘Early preparations, and a collaborative approach between public and private stakeholders, can help to ensure a successful exit from these contracts. This will require all parties seeking to understand each other’s goals, establishing a partnership approach on each PFI project, and sharing experiences on how to manage contract expiry across all levels of government.’[5]

‘IPA should: developing an investor strategy which manages the relationship with private sector PFI stakeholders – equity investors, management service companies, contractors – across all PFI contracts. Such a strategy should also consider working with other government bodies, such as UK Government Investments who may have interactions with similar sector companies.’[6]

‘The cooperation between the authority and SPV depends on the strength of the relationship.’ [7]

‘A successful exit from a PFI contract requires both careful preparation and delivery of the contractual obligations.  This part examines some of the components of this, such as understanding the contract, assessing future service requirements and relationship management.’[8]

As stated in section 3, it is widely accepted that collaboration is key to a successful expiry, and that a collaborative handback process should be developed and appropriately resourced, commencing at least 5-7 years before expiry.  But what does that entail?  Collaboration is a word bandied around without focus on what it really means, let alone what is required to achieve it.

The Institute for Collaborative Working leads the way in this regard, as the thought leaders under-pinning the international standard on collaborative working (ISO 44001- Collaborative business relationship management systems – Requirements and framework).

If a collaborative approach is desired, then proven processes should be implemented to achieve it, for example:

8. Technology

Adopting best-of-breed technology will be an important part of a successful expiry program. All such technology is readily available via the G-Cloud for easy procurement and implementation.

8.1 Contract Management Software[9]

Effective contract management by the public sector can ensure the SPV is being properly held to account and maintenance work is being completed in line with the contract. Contract management software is an essential tool in achieving that.[10]

The IPA or sponsor departments should implement best-of-breed contract management technology, as follows.

a)      Contract Repository

The NAO report recommended that the IPA and sponsor departments should ‘assess the costs and benefits of developing an electronic repository of PFI contracts which supports authorities to manage their contracts and helps sponsor departments and IPA to identify high-risk projects and enable a more consistent approach across government’.[11]

A central electronic repository of PFI contracts (such as that implemented by the MoD on all 18 of its DIO PFIs, and by investors across their portfolios of PFIs globally) will support Authorities in managing their contracts and will help sponsor departments, the IPA, SFT and LP to identify high-risk projects and enable a more consistent approach across government.[12]

For the first time, the Government would be able to be across its entire portfolio of PFIs, catching up with the best practice of its private sector partners.

b)     The contracts in the Contract Repository are fully up-to-date, with all amendments incorporated (‘single version of the truth’)

As the NAO notes:

‘The PFI contract is central to preparing for and managing the expiry process. These contracts are long, complex documents and in most cases, the parties to the PFI contract will have made amendments over time to change service requirements or achieve specific savings. … Depending on the number of variations, it can take a considerable amount of time to gather together the PFI contract.’ [13]

This builds on its earlier major report on transforming contract management in government; noting that:

• ‘systems for maintaining up-to-date versions of contracts remain weak’ [14], and
• ‘we have yet to see a system that shows departments their current contracts including all changes’. [15]

Similarly, the SFT notes that ‘as a first step the Authority should review the contractual documentation and ensure that it has a full copy of all relevant documents including any amendments and variations.’ [16]

Modern technology resolves this long-standing issue; providing all stakeholders with access to an online library of fully up-to-date contracts in IDF (or in HTML or PDF if the needs of the project require).  This is a ‘single version of the truth’ for all stakeholders. Each project is updated with further amendments and variations as and when they are made during the course of the project and leading up to expiry.

c)      Ensuring On-Going Contractual and Statutory Compliance

On-going contract and statutory management is vital to ensuring value for money is being delivered for the taxpayer and is the first step of the expiry process. It has, however, been a long-standing area of concern and a weakness in government contract management.

The SFT notes that:

‘While the Authority is preparing for Handback, it will also need to continue the ongoing contract management of the contract to ensure ongoing service delivery’, [17] and ‘we would expect that contract managers would monitor and closely manage the contracts in accordance with good practice. This should enable the Authority to achieve the service and standards to which it is entitled, while maintaining a constructive and open relationship with the private sector parties.’ [18]

Similarly, the NAO notes that:

‘Effective contract management by the public sector can ensure the SPV is being properly held to account and maintenance work is being completed in line with the contract.’ [19]

And in its report on contract management, the NAO noted that:

• ‘Poor contract management is a long-standing issue’ [20]
• ‘Previous attempts to improve contract management have not delivered sufficient change’ [21]
• ‘The underlying causes of problems in contract management go beyond poor administration and lapsed awareness’ …
• Government fails to recognise the value of contract management ….
• Senior managers in central government departments have not taken contract management seriously ….
• Senior managers have not demanded visibility over their contracts ….
• Managers have rarely demanded combined portfolio information to scrutinise and challenge operational contracts
• Government as a whole deploys less of its specialist commercial resources on contract management than the private sector ….. contract management has been vulnerable to administration cuts and under‑investment’ [22]
• ‘The government will not get value for money from its contracts until it improves contract management.’ [23]

This is the time for government to be on top of the contract management of its PFIs.

8.2 Asset Management Software

Modern asset register software should be adopted. The NAO notes that many Authorities do not even maintain asset registers. 

It is of fundamental importance to be on top of asset condition.

Modern asset management software collects asset data and presents it in dashboards in a manner which helps users understand and track all issues with condition and compliance. Asset hierarchy and APIs with SFG20 (the definitive standard for planned maintenance) gives users control over the right data held in the right format for future procurement.

8.3 Risk Management Software

Modern risk management software should be part of the government’s processes for PFI expiry.

8.4 Financial Modelling Software

Modern financial modelling software should be part of the government’s processes for PFI expiry.

8.4 Single Platform

Modern software is available for all key project information to be shown in one location (asset register, risk register, quality management, project management, contract management and statutory compliance, status of all tasks / actions, etc.)

The government should assess the software which is available in the G-Cloud for its PFI expiry programme and determine which software solutions provide best value-for-money, while taking full advantage of its purchasing power across government.

9. Budget & Resources

It goes without saying that it is important that budget and resources are made available at the outset of the expiry process.  The budget and resources are additional to those resources currently managing the contracts.[24]

This may prove to be particularly difficult in the Covid era, but failure to do so will be fatal to a successful expiry program, not just in ensuring value-for-money from the PFIs, but in ensuring seamless continuity of services for users and in optimising the future use of the assets.

The NAO has previously noted that public sector budget pressures have resulted in significant reductions in maintenance spending on non-PFI assets. For example, it noted that between 2014-2016, while health trusts reported an increase in the critical infrastructure maintenance backlog of more than 50% to £2.3 billion, HM Treasury allowed the NHS to move more than £1 billion of funding allocated for capital investment to pay for day-to-day spending. [25]  

In this context, it is of concern as to whether sufficient funds and resources will be made available for a successful expiry programme.

10. Conclusion

The NAO, PAC, HM Treasury, the media and the public have all struggled with a VfM narrative on PFIs in the UK. Good asset condition and smooth handover at expiry can positively affect that narrative significantly.  The Australian IPA report found that the PPP facilities ‘down-under’ maintain value for money over the long term. It is hoped that with a programme approach to PFI compliance and expiry in the UK, the same will be the case in the UK.

We would be delighted to answer any queries you may have or provide further information if you wish and look forward to your publication.

February 2021

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