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Why authorities should not fear PFI deals

recycling and energy recovery

Patience and orderly queueing are particularly British qualities; pushing to the front and demanding attention are not behaviours that come naturally. While good manners are always welcome, it is important that local authorities with Private Finance Initiative (PFI) or Public Private Partnership (PPP) contracts push the issue of operational savings to the top of their ‘to-do’ list and demand the attention of their private sector partners.

PFI has been the subject of media and political interest for a number of years, with reports of unreasonably high costs for the public sector and vast profits for the private sector. The decision to terminate the UK’s largest waste PFI contract between the Greater Manchester Waste Disposal Authority and Viridor Laing in September 2017 brought PFI contracts into sharp focus. This followed the decision by Lancashire County Council and its PFI contractor Global Renewables to terminate their PFI contract in 2014.

PFI was a method of financing large-scale infrastructure projects for successive Governments for more than two decades since being introduced in 1992. Government funding, in the form of PFI credits, was allocated to local authorities procuring infrastructure and services including schools, hospitals and waste solutions. Some projects were unsuccessful in applying for PFI funding; other councils chose to procure a solution without central Government financial support. These projects can be termed PPP.

Local Partnerships has played a key role for more than a decade in the Private Finance Unit based within Defra under the Waste Infrastructure Delivery Programme (WIDP). This is a £3bn scheme under which 25 local authorities currently receive PFI grant funding during the life of their waste treatment projects. The WIDP has helped to ensure the Government is on target to meet EU landfill diversion targets by 2020.

The criticisms of PFI/PPP and the willingness of a few authorities to terminate their contracts may lead others to consider termination. They may be tempted by the historic low rates of borrowing that are available to them through the Public Works Loans Board or face political pressure to terminate the contract.

Councils should consider the Treasury’s PPP Policy Note, Early termination of contracts, which was published in 2015. Termination is only one option that could be considered as part of a range open to those wishing to implement savings on their PFI/PPP contracts.

Local authorities should consider setting up a savings programme that identifies and analyses savings opportunities, and prioritises and implements the most appropriate.

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While PFI has been criticised for leaving authorities with expensive and inflexible contracts, it is a myth to say that such deals cannot be amended. Most PFI/PPP contracts will contain a formal change mechanism and, even if there is not such a mechanism, a local authority is free to approach its contractor suggesting modifications at any point. With careful con sideration and appropriate advice, councils can achieve substantial savings by implementing changes.

As part of the wider PFI operational savings initiative by the Treasury, Local Partnerships set up the Waste Operational Savings Programme (WOSP) with Defra. Authorities that sign up to WOSP work closely with Local Partnerships and Defra to identify and implement savings on their waste PFI contracts. Since 2013, more than £225m has been secured through WOSP, and there is the potential to increase the savings to more than £800m.

When setting up a savings programme for a PFI or PPP project, Local Partnerships recommends that authorities implement the following process: identify the objectives; build the team; set the rules; identify savings and prioritise them; conduct negotiations; and implement the changes.

Strong leadership and buy-in from the senior management team are critical success factors. Where officers and members share a clear vision of desired goals and outcomes, success is more likely.

A local authority should analyse the current environment of the project, understanding that there will have been changes to policy and/or legislation since the contracts were signed. An example of this is the abolition of the Landfill Allowance Trading Scheme, which provided a stimulus for many of the early PFI/PPP deals.

A savings programme should be treated in a similar manner to a new procurement. Achieving savings can actually be more challenging since there is no competitive tension resulting from a number of bidders vying for selection. A programme office should be established, with appropriate governance, and a business case plus detailed timetable should be drafted.

”Most PFI/PPP contracts wil contain a formal change mechanism and, even if there is not one, a local authority is free to approach its contractor suggesting modifications at any point.”

An adequate budget for the programme should be agreed at the outset, both for internal and external resources. The authority should carefully consider the level of input required from professional advisers, and think about appointing an appropriate mentor with the required commercial skills.

Once potential savings have been identified, the council should review the market to see whether such savings can be delivered. This could include discussions with peer authorities that have undertaken similar reviews. Authorities looking to change or terminate their PFI contract should consult Defra.

The next stage is to plan negotiating tactics carefully and identify levers which can be used to ensure that discussions with the contractor are productive. While there will be some areas which the contractor might wish to change, local authorities should be aware that the contractor will need to be incentivised to make changes.

Targets for a savings programme should be ambitious, realistic and agreed by the senior responsible officer and relevant members within the authority. Individuals should be confident and commercial in their approach to negotiations and reaching agreement on outcomes. Local Partnerships’ experience shows that, if this is the case, savings of 5-10% of the value of a contract are achievable.

PFI/PPP projects usually have a 25-year term and Local Partnerships suggests that a savings programme should cover between five and seven years. This is a reasonable period to plan for; beyond this involves an element of crystal ball-gazing as to the impact of potential changes in policy, legislation and technology.

When changes have been implemented at the end of a savings programme, local authorities should then consider restarting the process to cover the subsequent five to seven years.

There is no current pipeline of PFI projects in the waste sector and there are no plans for any further projects. Authorities will continue to use PPP as the method for procuring waste solutions, and should consider with their advisers the appropriate form of contract documents to use. A new draft version of the standard form PFI documentation was published by the Infrastructure & Projects Authority in the form of Private Finance 2. A final version is due to be published in 2018.

It is only in very rare circumstances that termination of a contract will be the best solution. Instead, local authorities should ensure they provide adequate resources for managing the contract, which includes implementing regular programmes of operational savings. This is challenging in times of austerity.

Councils will not always have the necessary specialist skills in-house, and it is important that they consider appointing advisers and a mentor. This will mean the public and private sector parties involved in the project can work together to give taxpayers more confidence in how their money is being used.

If you have a PFI/PPP contract, it is vital to undertake a review of whether optimal value is being achieved. This is an ‘invest to save’ opportunity for local authorities.

Examples of savings

1) Refinancing – a local authority can take advantage of the low interest rates by borrowing money and making a capital contribution to the project. This will lead to lower debt repayments for the contractor and lower monthly payments for the authority.

2) An authority can offer to take certain services out of the scope of the PFI/PPP contract.

3) The parties might wish to put in place stronger performance monitoring, enforcement and incentive mechanisms with the aim of encouraging a higher level of performance.

Huw Russell is a solicitor and project director at Local Partnerships

What is Local Partnerships?

Local Partnerships is a joint venture between the Treasury and the Local Government Association. It provides an interface between central government policy and local delivery, helping the public sector to deliver projects and change at the local level. Its team of experts works solely for the benefit of the public sector, helping councils, combined authorities and the third sector to overcome complex challenges and improve their chances of success. Local Partnerships has published guidance to assist local authorities in managing a waste contract and case studies. A report on the lessons learned in supporting local authorities to achieve operational savings in the waste sector will be published on the Local Partnerships website shortly.

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