Breaking the PFI status quo

4 Aug 16

Many PFI contracts are trapped in their current terms out of fear of the costs of change and a desire not to show weakness to the other side. But this is not sustainable in the face of increasing cost pressures.

St Andrew Square in Edinburgh

The closure in Edinburgh of schools built under a public private partnership has put the procurement model back in the news. Photo: iStock

 

Private Finance Initiatives (PFI) and Public Private Partnerships (PPP) are seldom out of the headlines. News that a number of schools in Edinburgh, built under a PPP contract, had to be closed because of construction concerns have been broadcast worldwide. This state of affairs is indeed shocking, but is it really a shock to those who work in the PFI and related PPP industry?

For Edinburgh, one could just as easily read London, Liverpool or any of the locations where these contracts have been signed. The PFI industry has long struggled to convince doubters, and it has increasingly become a political football in the most challenging fiscal climate for over 70 years.

Yet, many people have short memories and forget the crumbling state of many of the health and education facilities from which the UK was delivering front line public services during the late 1980s and early 1990s. The landscape has been transformed by well over 1,000 new “fit for purpose” facilities that have enhanced local communities and those who live and work in them.

Despite the achievements of PPI and PFI contracts, the industry from the start has been plagued by a lack of visibility, trust and understanding of the objectives between public and private sector partners. And although 180 public and private sector organisations have signed the 2013 code of conduct created for the contracts, these partnerships have become increasingly adversarial.

Indeed, too much time and effort is being expended on conflict resolution rather than on ensuring that the projects achieve their original aims. The Edinburgh episode will only serve to entrench such positions throughout the UK.

The great majority of these PFI contracts were constructed and signed off before the emergence of the global financial crisis in 2008. This is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s.

Given the government’s public sector austerity measures will reduce expenditure by more than 30% in real terms by 2020, many of the current contracts are no longer viable under efficiency planning.

This has to be recognised by all parties and they must work together and to conduct a fundamental review. Only by confronting these issues can ways of making these projects economically sustainable in the long-term be devised. Both sides of the partnership, from the private and public sector, have key lessons to learn.

All too often, private sector parties have been seen to duck behind a contractual parapet regardless of whether or not they have signed up to the Code of Conduct. Arguably, the time has come for the private sector to take a longer-term and more balanced view.

The public sector too has, in many cases, taken a line of enforcing absolute contractual compliance. Whilst entirely understandable in the first instance, when taken to its extremes this process has sometimes suffocated the debate between the parties and obstructed cost saving opportunities.

Indeed, the cost saving measures in place, such as market testing and benchmarking processes, within a PFI contract, are proving to be expensive, time-consuming and ultimately utterly useless tools for managing costs going forward. The only true way to obtain real sustainable cost reductions is to create an environment where positive and meaningful dialogue is possible between all parties.

To create constructive working relationships, each party needs a clear understanding of the other’s roles and responsibilities. The public sector must acknowledge the contractual obligations signed up to and the private sector should deliver to those obligations in a full, fair and auditable manner. Where these obligations are no longer achievable, due to affordability considerations for example, all parties must willingly enter into a mature, constructive dialogue. It is of paramount importance that such exercises are approached with a collective “can do” mentality. 

At present, there are significant amounts of time, money and other expensive resource being applied to PFI and PPP contracts in an attempt to maintain a sort of invisible ‘status quo’. This is mainly driven through a fear of the costs involved in change and a desperate desire not to show weakness to the other side. Such a position cannot be sustainable in the face of local and national pressures as it can only result in precious, increasingly scarce resources being squandered on increasing levels of litigation.

Sadly it is impossible, statistically, to believe that there will not be more ‘Edinburghs’ and resultantly more litigation. And when parties should be working collaboratively to find a way to promote a market that has taken public sector facilities into the 21st century, doubtless, there will be more PFI critics decrying everything about the entire industry. 

But, it isn’t all doom and gloom. There is hope that whilst the public sector does a lot of soul searching, the collaborative and cooperative relationships will be redefined to deliver the solutions that are urgently needed. There could well be light at the end of the tunnel if each party wants there to be.

 

  • Chris Everden

    Chris Everden is the managing director of FM Specific and works closely with CIPFA on reviewing PFI/PPP contracts

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