Malcolm Iley puts forward his suggestions for making partnerships work The recent National Audit Office report on the comparative effectiveness of PFI as a procurement method was timely, especially when UK PFI/PPP mechanisms are being adopted successfully abroad. Delivery of successful partnerships which are cost effective is an ongoing challenge. Issues which impact on delivery of partnerships include: Competitive dialogue procedure Get real and understand the difference between this procedure and the negotiated procedure, the traditional basis on which many PFI/PPP projects have been procured. Concerns over the use of an unfamiliar procedure, higher bid costs, and that councils may now contribute towards bid costs – which can be high and off-putting to all but the major market players – but whatever, competitive dialogue is the preferred option of Office of Government Commerce. But does the market understand this new procedure? Are council procurement teams really up-to-date as to how this procedure will work effectively? Funding The importance of carrying out financial due diligence, refinancing, and compensation on termination continue to be high-profile issues. The traditional basis of project finance for council PPPs needs now to also consider the potential for use of the prudential borrowing powers, eg, in waste/infrastructure projects, or where PFI credits are unavailable. Risk – ‘pass-down’ A cardinal principle within a PFI structure is successful and sustainable risk transfer. However, some contractors and bidders still continue to use standard form of industry contracts without necessarily adapting to step down risk to sub-contractors. TUPE/pensions The impact of the new pension regulations amendments to the TUPE regulations and single-tier workforce, and the secondment/retention of employment model are live negotiation issues. Meeting the pensions shortfall – and at whose risk – is now an upfront issue than deferred to contract close. Contractor stability The recent demise of some contractors and mergers and restructurings make it imperative that early due diligence is carried out and direct agreements are robust. As ever, do councils identify the actual contracting entity early enough in the procurement process? Local government reorganisation The general restructuring of local government, in terms of its financing base, could have important impacts for existing and new projects. In recent months, the Project Review Group has been known to consider the implications within the sector of regional or sub-regional reorganisation – eg, waste sector – and direct that regional and sub-regional material considerations are relevant to project approvals. Public policy How will policy issues impact on the ability of councils to procure – eg, the Lyons review, ‘new localism’, duty to promote sustainable communities, Gershon, and governance requirements on inter-authority procurements. The increasing trend for councils to take equity in PPP joint ventures is already very relevant. Affordability The achievement of PFI credits in some sectors continues to be more difficult than others – eg, waste – how will councils meet the gap? Will they use the prudential borrowing power? Will they procure smaller projects but on a phased basis? Will they discount PFI and adopt a more flexible PPP structure? Will they use assets more strategically, and reduce the effect of long-term financing options? PUK’s paper Strengthening long-term partnerships This pledges to shorten PFI contracts, exclude soft services from some deals, use credit guarantee financing, drive for lower funding costs, and approve projects where value for money is demonstrated. Councils will continue to need to develop robust financial models which ensure value over the whole life of a project, and incentivise continuous improvement of services. w Malcolm Iley is a partner, public sector commercial/projects group with Trowers & Hamlins
