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PFI - Q&A19/01/2018
Paul Walsh our Engagement Director answers a few questions about PFI (private finance initiatives) and his experience of managing change within these complex contracts.
What does the current PFI landscape look like?
PFI schemes are big business in the UK. Official figures show there are over 700 schemes with a combined annual cost of circa £10Bn. They cover nearly all aspects of public sector delivery from hospitals to roads. We have recently been successful in renegotiating certain aspects of in-flight PFI contracts, realising life cycle savings of over £16 million for one of our clients, with a further £100m identified for delivery.
What is the bad press?
PFI contracts tend to be complex and very long term. There have been examples of contracts not delivering value for money or the right level of service but the main ‘bad press’ is related to the level of spend and the difficulty in reducing this.
Is change possible?
Change is possible, but it must be remembered that the length and complexity of a PFI contract is because they are using private finance to fund a hospital for example, through its build phase, and then through it’s operational phase for perhaps 25 years. At the end of this term, the provider may be required to hand the asset over, in a certain condition.
Change has to be considered alongside the fact that the provider has to maintain things in a certain way to guarantee a level of service as set out in the contract, plus repaying the finance that was raised at the outset.
Compare this with a non-PFI building, where equivalent on-going maintenance budgets can be more freely cut, resulting in lower standards and conditions.
Where do you start?
As with any contract review, the starting point is the contract itself. In many cases, these may be 10 years old or more, and requirements may have changed since then. Where this is the case, there may be opportunities to ‘right size’ aspects of delivery without impacting on operational capability.
Some contracts may have Benchmarking or Market Testing mechanisms within them, which provide an invaluable opportunity to establish new baselines for the future service, and contract management clauses can offer opportunities to make ongoing changes in one form or another.
How have you managed engagements on PFI contracts?
The key relationship is with the customer, who benefits from the PFI contract directly in terms of facilities or service provision. Working also with commercial and finance managers helps to develop an understanding of how the PFI has performed, and how it has evolved.
Engaging with the PFI provider is vitally important, but it is worth bearing in mind that they will usually be a ‘special purpose vehicle’ set up to run the PFI and nothing else, with parent company backers, and financial investors behind them.
What has been the result and what do you think organisations should do next?
We have been able to identify significant cost savings opportunities across a range of approaches, commencing with a PFI Contract Review. It is definitely worth organisations with current long term PFI contracts beginning the contract review process if they have not already done so, and starting to target real cashable savings for their revenue budgets.