19th March 1999
SECOND REVIEW OF THE PRIVATE FINANCE INITIATIVE BY SIR MALCOLM BATES
SUMMARY OF RECOMMENDATIONS
Recommendations
A. Recommendations for immediate or early action
Policy Statements
1. The Government should publish a policy statement to replace "Partnerships in Prosperity" that : (i) reconfirms its commitment to PFI as a procurement tool; (ii) clarifies its intentions with regard to PPPs and their role in the Wider Markets proposals; and (iii) defines the various types of PPPs the Government envisages.
This can be seen as an opportunity for the 'rebranding' of PFI, as just one of a range of Public/Private Partnership models. Perhaps, now the use of private finance has become a mainstream procurement tool, it has grown beyond an 'initiative'.
Contract Templates
2. Departments should be required to adopt and follow the template guidance unless there are compelling grounds not to do so (which they should be encouraged to discuss and agree with the Taskforce in advance).
3. Departments should only issue their own standard documents if they have been agreed by the Taskforce to be consistent with the general standards laid down by the Taskforce's own generic guidance.
The Taskforce
4. The projects arm of the Taskforce should continue. The form in which it should continue is discussed in Section C below:
For the remainder of its original life, its main objectives should be to:
a) help Departmental PFUs and procurement teams to deliver value for money outcomes in significant PFI deals already in procurement;
b) complete and issue essential PFI template guidance, including assisting Departments to develop sector specific templates consistent with its own;
c) work with Treasury Expenditure teams and Departments to develop the new generation of PFI projects emerging from Departmental Investment Strategies and supported by the Capital Modernisation Fund, "road-testing" them as envisaged at the time of the first review; and
d) address areas of difficulty in the PFI procurement process as they emerge.
See also recommendations 23 and 24 below on Wider Markets PPPs.
5. The Taskforce should be resourced sufficiently to carry out effectively its emerging 'troubleshooting' role for projects in difficulty, which will continue to be needed.
In these, and in other cases, it would be beneficial for the Taskforce to have direct access to the responsible Secretary of State.
6. The Taskforce should have responsibility for determining whether a project should be regarded as "significant" and whether to intervene to sign-off its commercial viability.
This could be achieved if Departments and Agencies were to notify the Taskforce of all but the smallest PFI projects prior to the start of the procurement process.
7. The Taskforce should have the right to nominate a member to the Project Board supervising any significant project.
8. The management of the Taskforce would be further improved by the recruitment of an experienced deputy to the Chief Executive.
The Project Review Group
9. The PRG, or a body capable of fulfilling the same functions, will need to continue for the foreseeable future. Additional resources should be allocated to build on the PRG process. There are good arguments to suggest that the PRG process should extend to other parts of the public sector.
It was suggested to me that there were still not sufficiently clear, measurable, needs-based criteria for resource allocation to Local Government projects. I understand that new criteria have recently been agreed and promulgated, which I trust will fulfil the requirement.
10. The Taskforce should consider, with the 4Ps and the PRG departments, how much more could be done to support local authority projects once the PRG has signed them off.
Given the large number of deals now in the pipeline, the fragmented nature of the sector and the relative inexperience of local authorities in PFI, there is a particular need in this sector for project management support, training and the dissemination of knowledge.
Skills and Training
11. DPFUs could be strengthened with deal-making skills, most likely to be found in the private sector, to reduce reliance on the Taskforce for what should be routine help.
Secondees cannot be the long term answer to the structural weaknesses in public sector procurement, but they can be a convenient and cost-effective way to acquire temporary resource with transaction capability and experience. The public sector needs to address its ability to develop sufficient in-house skills and provide financial and career incentives to ensure that, once gained, such skills are not lost.
12. Consideration should be given to involving key private sector participants in public sector PFI training to help spread best practice and familiarise the public sector with private sector practices
Views were expressed to me that PFI /PPP training in both the public and private sectors draw too much from their own sides - so recycling misunderstanding.
13. All public sector staff engaged in PFI should have undertaken a training needs analysis, updated annually.
Strategic Planning
14. Commercial and financial expertise could be brought to bear at an early stage in the development of Departmental Investment Strategies, to assess whether Departments are proposing a balanced portfolio of feasible, deliverable investment options in pursuit of their policy goals. The Taskforce, or a similar body, could provide a valuable resource to assist officials in such an examination.
A successful strategic approach to Departments' investments requires a combination of imaginative origination of projects, accurate assessment of deliverability and clear prioritisation of competing claims. Departments are responsible for their Investment Strategies, but private sector skills in these areas, so long as they are up to date with market developments, can make a major contribution.
Project Management
15. One individual should be specifically charged with pursuing a major project to completion. For all very large projects (say, £50 million and over), this person should have a direct reporting line to the Agency Chief Executive, the Permanent Secretary or, even, a Minister, ie very top management.
16. There is an on-going role for the Taskforce, or a similar body, reinforced by project management specialists, to assist the sharpening of current project management practices in Central and Local Government.
Financing
17. The public sector needs to develop, or have ready access to, its own skill base in private financing techniques to build on the contribution the Taskforce has made.
The management of advisers, negotiation with bidders, evaluation of deliverability and identification of new project opportunities are all improved by the ready availability of private sector financing skills.
Service Management
18. The Taskforce should consider whether the maintenance of service standards from PFI projects raises sufficient PFI-specific issues to require a further training programme in addition to preparing guidance on this issue. In so doing, it should draw on the experience of those projects in Departments and Agencies which have now moved into the delivery or operational phases.
As PFI matures, the focus is broadening from initial procurement to the management of service levels to assure value for money over the long term. There needs to be as much concentration on making PFI/PPPs work in practice as on deal making. I understand that guidance on this subject is being prepared by the Taskforce.
IT PFI
19. Departments and Agencies should make every endeavour to understand, before procurement activity commences, the implications for changes in working practices that will transpire when a major IT system is introduced.
This may mean that the preparation phase should include separately commissioned work on the changes likely and their implications for the organisation and its staff.
20. The Taskforce should work with both the public and private sectors to develop a more open use of project finance for IT projects.
The Government would not wish to see competition being limited in IT projects on account of procurement procedures and contract structures being less favourable to project finance supported proposals.
21. The Taskforce should aim to develop a more practical approach to the selection of a preferred bidder and to streamline the typical tender process for IT projects. For contracts to be drafted in detail with all short-listed bidders before a preferred bidder is chosen is expensive and time consuming and is not recommended.
Part of this work will be to adapt generic contract templates for use in IT deals. In carrying it forward, the Taskforce will want to involve CCTA and the IT industry.
22. The Taskforce should explore and develop deal models appropriate for IT.
Possible models would be:
a) the mainstream "services-based" model with a clear output specification, where a charging mechanism based on availability and performance can be agreed at the outset;
b) a straightforward "transaction-based" model, where the charging mechanism is based on payment for each transaction successfully completed; and
c) a more flexible "benefits-based" model, allowing flexible service provision to meet changing needs, with efficiency improvements over the contract period underpinned by payments linked to business benefits achieved by the client.
The last option should allow longer concession lengths.
B. Recommendations to give effect to the new Wider Markets guidance
23. There is an urgent role for the provision of support to Departments and Agencies from the Taskforce (or a body very like it) if satisfactory progress in exploiting the potential for Wider Markets PPPs is to be achieved.
There are important differences between (i) a 'Wider Markets' public/private partnership to exploit underused public sector assets with commercial potential, and (ii) a typical PFI deal. Nevertheless, valuable lessons for these PPPs can be learned from the way PFI deals are structured: advisers need to be appointed, partners selected, negotiating frameworks set, risks identified, assessed and allocated, all with the objective of achieving best value for money.
24. The agenda for this support should include:
a) close interaction between policy and deals - along the lines of the existing arrangements for the Taskforce - including dealing with teething problems;
b) close co-ordination between wider markets policy and PFI policy, with a recognition that Wider Markets concepts can form part of PFI deals to the benefit of both parties;
c) developing best practice guidance where appropriate, for example, on business cases, contract and SPV structures, asset vesting etc;
d) an emphasis on origination of opportunities; and
e) training and development.
C. Recommendations for arrangements to follow the Taskforce
The importance of private finance to the Government is clear. Over the 3 year period covered by the Comprehensive Spending Review, approximately £11 billion of infrastructure investment, will be privately financed. This is 30% of net publicly sponsored or funded investment during that period.
However, the general perception is that there are still serious weaknesses in large parts of public sector procurement, for example, in strategic planning, in project management, in financial disciplines and in the management of long-term contracts. In other words, there remains a shortage of the essential skills to set up effective partnerships with the private sector, whether in PFI deals or those expected under the Wider Markets guidance.
The vision which underpinned the first Review - of no more than a short term need for the Taskforce - is called into question.
I have considered four options for institutional arrangements to succeed the projects arm of the Taskforce after its proposed two-year term is completed later this year. The options are:
Option 1 - Disband the projects arm
Option 2 - Extend the life of the projects arm
Option 3 - A public sector, fee-earning Agency
Option 4 - A new Public/Private Partnership
25. Under any option, a PFI/PPP policy team should remain in the Treasury, maintaining close links to other central teams with procurement policy responsibilities.
26. An early decision on the arrangements to follow the Taskforce would avoid damaging market confidence.
Future arrangements will also need to be consistent with any changes Ministers choose to make following Mr Peter Gershon's review of procurement.
Option 1 - Disband the projects arm
27. It would not be helpful to disband the Taskforce at the end of its two-year term.
It would be premature to stand down a strong source of central expertise while it is still very much in demand.
Option 2 - Extend the life of the projects arm
28. Simply to extend of the life of the projects arm, with unchanged governance and remit, would not be sufficient.
I heard strong arguments for "no change", but there would be practical difficulties in an extension, and an opportunity missed to recognise the changed circumstances. In particular:
a) too short an extension would not see essential skills transferred to Departments, while too long an extension would risk "bureaucratising" the Taskforce if new governance arrangements were not put in place;
b) it would be hard to recruit such a high quality team again (or to retain the present one);
c) the Taskforce would have a very limited role at a project level, where the need for new skills is greatest; and
d) it could, as presently constituted, do little to exploit the public sector's bulk purchasing leverage on finance costs.
Option 3 - A public sector, fee-earning Agency
29. The Taskforce could remain in the public sector, but with arm's length status as an Agency. It might operate like CCTA, largely on a fee-earning basis.
It might have a dual mandate as follows:
a) a lead role in policy guidance, rule making and as custodian of best practice, funded by grant by the Treasury; and
b) advising Departments on the implementation of PFI projects, on a fee-earning basis
30. As for option 2, public sector status and remuneration could be a deterrent to recruiting and retaining the best people. And this option does not have the ability to offer the full combination of project management skills and funding capability.
31. On the other hand, this option has the merit of providing a permanent home for the taskforce within the Civil Service, in a manner which would allow the projects capability to be deployed more widely in support of public sector procurement.
Option 4 - A new Public/Private Partnership
32. Alternatively, the Government might consider establishing a Public/Private Partnership (described as UKPPP for the purpose of this report ) to make a combination of high quality project and financial skills available, permanently and flexibly, to support public sector authorities' PFI procurement and PPPs and to overcome the weaknesses indicated in the review.
UKPPP would have a mandate from the Government to work in the public interest. The Government would have a large, but minority share. There should be no obligation on any procuring authority to use UKPPP's services; on the contrary, it should win business by the strength of its offer. Its majority private sector shareholding would help to provide this discipline. Some of the capabilities of the projects arm of the Taskforce - for example, in strategic planning and project appraisal - would still be needed in the Treasury. Staff might be supplied on secondment from UKPPP, at the Treasury's cost.
Such a body would:
a) complement improvements in public sector procurement by working in partnership with public authorities to get the best out of their privately financed investment programmes;
b) offer individual public sector authorities a combination of project management skills and funding capability - such as development costs support;
c) ensure information, knowledge and experience are retained and transferred quickly on the public sector side, achieving keener prices for projects; and
d) allow the public sector to capture some of the equity upside generated by successful projects, perhaps by taking small minority stakes in projects or providing initial seed capital.
A decision to go ahead with this option would depend on the development of a detailed business case, setting out the likely risks and rewards.