The PFI Programme for Local Government: what worked well?
Rob Hann sets out his views as to what worked well under the local government PFI programme which ran between 1997 and 2015.
Rob has unique insight as to how the PFI investment programme for local government was successfully delivered from zero projects in 1997 to over 300 major projects across all local government sectors by 2015. Rob was one of the original team of advisers from across the professional and sector divide at 4ps (‘the Public Private Partnerships Programme’) which was set up in 1996 by the Local Government Association to help local authorities across England and Wales to deliver PFI projects. For 20 years (between 1996-2016) Rob worked at the forefront of the PFI roll out programme across local government as Head of Legal at 4ps and (later) its successor body, Local Partnerships (‘LP’).
What with all the political upheaval that has taken place recently, the cost-of-living crisis, spiralling inflation, a major war in Europe and a post-Brexit recession, perhaps it is understandable if the pending expiry of many long-term contracts across the local government spectrum may not be at the forefront of hard-pressed local authority chief officer’s minds? Yet it is crucial to give serious thought, not just to PFI expiry, but also, in these cash strapped times, to what comes next and what lessons can be learned from what worked and what didn’t with the roll out and delivery of the local government PFI programme in England and Wales.
The PFI Programme for local government (in one sense at least) ended several years ago when the (then) Conservative Chancellor Phillip Hammond pulled the shroud over the PFI corpse in October 2018 and PF2 (the then Government’s intended successor to PFI) was also shelved. However, whilst the funding of new PFI projects was terminated, it was not the end of the PFI story, given the significant numbers of PFI contracts that had, by that time, been let (and were operational) across the public sector spectrum. The PFI ‘corpse’ continues to twitch as those legacy PFI contracts wind their way to the end of their respective contractual terms.
Some attention (somewhat belatedly) has been given to the problems and complexities all public bodies will face as these large, detailed contracts come towards expiry. But perhaps more significantly for the local government sector is the fact that upon expiry, the PFI funding that was provided back in the day, for the whole life of these projects by the relevant central government department, will also dry up with no promise (as yet anyway) or prospect of future funding to help with on-going costs of operation, maintenance, and replacement of what will be major assets which are probably already past their best.
With no plans to kickstart another, alternative long-term investment programme for local government, this also means there is no encouragement for new LA projects to come forward to bid for funding to meet the huge capital investment needs of the wider local government estate. If this Government (and any future Government) is serious about promoting growth and ‘levelling up’ disparity between regions, it would be well advised to look carefully at the lessons to be drawn from the roll out of the local government PFI programme.
In today’s local government environment, we now have Combined Authorities (‘CA’s’) in many regions which could take the lead, with the constituent authorities, to marshal expertise to, not only bring existing PFI contracts to a cost-effective end, but also to plan pan-regionally for necessary replacement services going forward.
Think what could be achieved if a street lighting project was not limited by traditional geographical LA boundaries? Or if waste collection and disposal services were procured and/or funded regionally through a combined authority who could contract directly, on behalf of constituent LA’s, with service providers and which were resourced centrally to manage such contracts? Combining carbon reduction initiatives (CO2) to a region-wide waste collection fleet would also be a great way to improve air quality, boost local economies, join up policies and stimulate jobs to help combat the post-pandemic recession.
Procuring through a Combined Authority (‘CA’) wasn’t an option under PFI given there were no means by which such contracts could be let or managed across a wide area, but now this is possible through a CA, sadly there seems to be no central government funding or incentive to make this happen.
Regarding PFI expiry to date, the emphasis has been very much on how to facilitate the pending transfer of the PFI assets and services. Both the Public Accounts Committee (PAC) and the National Audit Office (NAO) have flagged[1] the fact that a great many of these long term PFI contracts are to cease over the next decade, and they warn that public bodies need to act without delay to plan for the transition to whatever comes next in terms of crucial public sector service continuity. The scale of the issue (across the public sector writ large is outlined in a PAC report:
“Over the next 10 years, an estimated 200 PFI projects will come to an end, representing £10 billion of assets. In most cases, when a PFI contract expires, the assets will transfer to the public sector. The process is complex and requires the public body (the authority) that entered into the original contract to take several actions in advance of expiry. First, the authority has a duty to ensure the private company has completed any scheduled or reactive maintenance, including any rectification work required to bring the asset up to the condition stipulated in the contract. Second, the authority needs to decide if the assets and services are required after expiry and, if so, how the asset will be maintained, and the services provided.”
The PAC also asked searching questions as to the readiness and capability of government departments and other public bodies (such as local authorities) to deal with the complexities which will inevitably arise, and which will need to be resolved on a contract-by-contract basis with the vast majority of these infrastructure projects.
The Infrastructure and Projects Authority (‘the IPA’) came in for particular attention given its role as the Government’s ‘centre of expertise’ for infrastructure and major projects, and which was set up to provide advice and support to departments and authorities. The PAC made some hard-hitting recommendations setting out what they expect to see by way of support to public bodies to help with PFI expiry. As a result, the IPA recruited an ‘army’ of approved consultants with PFI experience who are now being mobilised to help individual public bodies with expiry issues. A substantial swathe of guidance was also published (28th February) and can be found here (the IPA Guidance).
Whilst practical help and guidance relating to the existing PFI contracts will be very welcome for those public bodies fortunate enough to secure help from this source, what individual local authorities with such projects urgently need is help with procuring new service suppliers, help with the transition to new service providers and help with the ongoing costs of investment, maintenance and upgrade or replacement. If any new funding programme were to be announced, new projects would not be faced with the myriad of difficulties the PFI faced and had to overcome when it was first introduced. New projects could start from the strong legacy and base left by PFI.
There follows five approaches which (I believe) worked well for the PFI in local government and which, with minimal updating, could be replicated to help any new major investment programme for local government which might encompass legacy PFI projects.
Firstly, making a significant funding ‘pot’ available to help local authorities to afford the costs involved in funding investment in capital and infrastructure over a lengthy contractual term (often 25 years or more) was absolutely fundamental to kick-starting LA interest in the PFI. The New Labour Government, when elected to Government in 1997, immediately set about turbo-charging interest in local government towards the PFI, initially to meet their manifesto pledge to put major investment into schools – (‘Education, Education, Education’) - by making significant funding available across the local government spectrum to meet needs.
The then Labour government promised local authorities 80% of whole-life costs of a PFI to be fed through to them individually via revenue support over the term of the relevant contract. For local government, PFI credits (and later PFI grants) became (pretty much) the only way in which major investment could be secured and ring-fenced locally to meet the high and on-going costs of such projects. Many authorities nation-wide took advantage of this ‘extra’ funding and came back again and again for more PFI credits in different sectors, not just schools, but waste management, extra-care housing, social care, transport, roads and many more local government sectors benefitted from PFI ring-fenced investment. The range and type of project varied hugely from the flag-ship projects such as the new tram line delivered by my own local authority (Nottingham) to the myriad of PFI buildings including schools (of course), leisure centres, joint service centres, housing and adult care facilities and a national network PFI waste management centres which would never have seen the light of day without PFI credits having been promised and provided by Government for these projects’ life-cycle.
Where is the investment in local government infrastructure now? How can LA’s afford to fund legacy PFI needs (and new schemes) when there is no structured way of feeding through such funding and marshalling projects to market in an organised and appropriate way, as happened under the PFI?
Secondly, a competitive process was established at the strategic level whereby local authorities were invited to bid for PFI funding and to submit fully costed and developed business cases which could then be scrutinised, road-tested, and challenged by central government against a pre-published range of criteria. The PFI programme in local government for the first and (as far as I am aware) last time, created a central/local co-operation on a project/LA specific basis whereby a committee of very senior civil servants from each central government funding department (DEFRA, DFE, DH, DCLG etc), chaired by a senior representative from HM Treasury (the Project Review Group or ‘PRG’ as this body became known), would consider business cases submitted by individual local authorities applying for funding of major local projects, well before those projects were permitted to go anywhere near the open market for procurement purposes.
This system of pre-market funding approval by the PRG (central government) had real practical advantages.
If such projects, following PRG scrutiny, got an HMT ‘tick-in-the-funding-box’ that would assist the market and encourage bidders to spend time and money at risk in competition in the knowledge that the local authority would be put in funds by (effectively) central government/ HMT. Any potential private sector service provider thinking of bidding for such opportunity would know that the relevant local authority had the promise of significant funding for the whole life of the project. It also ensured only well-structured and well supported projects both locally and centrally would proceed to market. Given the risk and costs of bidding for PFI contracts this became an extremely important factor when stimulating the market to engage as it gave confidence as to the respective LA ‘covenant’ and ability to meet contractual payments over the lengthy contract term. Providing such funding guarantee at the outset (pre-procurement) helped galvanize the market’s interest in these projects leading to healthy and strong competition, given the bidders (amongst other things) had some comfort around the particular LA’s ability to make payments over the contract term.
Where will that competition now come from when LA’s go out to tender for replacement services in anticipation of PFI expiry? Will service providers in the market be interested in taking over major assets supplied by someone else many years ago?
Currently, regarding procurement law, the UK is still in transition stage post Brexit so no-one has any certainty or knowledge over what procurement process will be used or what processes and hurdles bidders are meant to navigate to get the right to service the legacy PFI sector or what risks they will be taking on. This will all be left to individual local authorities to navigate and determine, which will create (at best) inconsistency (and therefore more expense) for hard pressed potential service suppliers to bid for such contracts.
But why would potential contractors/bidders bother to engage especially where there is no standardisation around processes to be adopted and the expense involved in bidding for individual projects?
Thirdly, the emphasis on developing a pipeline of major projects from the local authority sector also required significant thought and practical help be given to the removal or mitigation of the many obstacles to PFI and long-term contracts. Several legislative difficulties were removed specifically to facilitate the PFI. The Local Government (Contracts) Act 1997 was one of many measures taken by central government to address local authority vires issues. However, the 1997 Act was never PFI specific, and it remains a really helpful piece of legislation available to give banks and funders confidence to do business with the local government sector through other (perhaps new) forms of PPP.
The whole area of local authority powers and the ultra vires concerns of years past has also changed and improved significantly with powers of general competence and the repeal of most of the complexities caused by the best value legislation. So, once again there are positives here for any future funding programme for local government around the confidence of the market to lend to, and do business with, individual local authorities. The Combined Authority and regional government changes mentioned above should also help with this aspect as CA’s can let major contracts across their geographical scope.
Fourthly, contract and commercial issues were addressed as never before under the PFI programme to help smooth the path from project gestation, through the procurement stage and onto the signing of the contract. The Standardisation of PFI Contracts (‘SOPC’) became the PFI lawyer’s ‘bible’ as it contained standardised template clauses which had been developed from intelligence gathered from the very early tranches of PFI signed projects. Over time, many of these clauses became HM Treasury required drafting in PFI, along with standard, sector specific template contracts for (e.g.) housing, waste, transport and many other LA service areas, reducing time and cost during the (expensive) procurement phase and helping to speed up the passage to contract signing. This firm contractual approach gave local government, for the first time, a sound platform on which to procure and engage service suppliers.
After all that work centrally and locally to arrive at a set of standard commercial clauses for local government what has happened, I wonder, to SOPC now? Is it still being used on fresh projects by local government, or does it lay fallow on shelves gathering dust? I suspect the latter. There has been no substantive updating of SOPC drafting since 2006/07 and given the risks and factors that have emerged since these clauses were introduced (e.g. the pandemic, Brexit, global warming etc etc) a review is well overdue. Alas, no central body (to my knowledge anyway) is developing templates, procurement packs and sector specific contracts to help LA’s meet the challenges of procuring post-PFI services.
Comprehensive ‘procurement packs’ containing much needed templates for navigating the EU inspired competitive dialogue procurement process were developed by 4ps, along with other practical help such as ‘procurement ‘boot camps’, all of which were designed to make procurement more stream-lined and less complex, quicker and less expensive for all concerned (market included) but currently there seems to be no plan for procuring services for PFI projects heading for close and post close. This will lead, at best, to bottlenecks in the market and a potential dearth of potential bidders if there continues to be little or no co-ordination from the centre.
Finally, a significant amount of work went into developing and nurturing understanding of the PFI of the contractors active in the market. Warming up the market (market testing or market sounding), informing bidders what was going to happen by when, sticking to deadlines, trying to get the potential bidders to focus on PFI projects to get maximum involvement and competition and to take the risk and costs of bidding was paramount back in the day and led (in the main) to robust and fiercely competitive processes which helped in turn, to secure value for money. These factors have never been more important than currently. How do we give the market confidence to put their resources at risk to bid for opportunities when even the very law governing the process is in such a state of flux?
How bidders engage with local authorities and what processes will they be following if such projects were rolled out today is anyone’s guess? Under the PFI programme this focus on seeing things from the service providers perspective really helped to facilitate a strong response to most PFI advertised opportunities and a robust competitive process leading to the appointment of (in the main) responsible cadre of service providers expert in the sector.
In short, what the PFI programme achieved in local government was the establishment of a strong pipeline of projects across very different LA service areas with service providers bidding in competition (with each other) for Government funding in the form of a 70%-80% (effective) funding guarantee from HM Treasury of the capital-intensive revenue costs over the 25-year term of the average PFI contract. Never before or since has such a copper-bottomed funding promise made to individual local authorities by government departments and HM Treasury.
Never before or since has there been an effective Nation-wide interest and close collaboration between central government funding bodies and individual local authorities, all focussed on locally based investment priorities. Ring-fenced PFI funding provided through the revenue support mechanism helped (and still helps) to pay for and maintain these serviced assets over the long life of each PFI contract. And (in theory at least), the authority maintains the ability to hit the contractor in the pocket if it is not getting the service it contracted to receive. But this all ends soon and there is nothing, semmingly, to take the place of PFI.
In summary, the NAO and PAC guidance are a timely reminder of what will be happening soon for many PFI contracts but with the challenges faced by all LA’s going forward, substantial financial incentives to actively promote bids for new investment and funding are urgently needed.
There is perhaps a final opportunity to thoroughly review what we can take from the PFI that was beneficial and to explore whether at least some of this can be recycled efficiently for the next generation of local government investment?
Central Government should be ‘harvesting’ what worked well under the PFI to stimulate, and kick start a major new local government investment programme in local government as these old contracts expire. Local authorities should be given incentives now to come forward with ideas and proposals which identifies their needs to take on serviced assets directly and/or to outsource those services once again, perhaps in a different way going forward and which takes on board the hard learned lessons of the past.
Rob Hann is Head of Local Government at Sharpe Pritchard and can be contacted here This email address is being protected from spambots. You need JavaScript enabled to view it..
[1] See the 2021 PAC report here and the 2020 NAO report here
