PFI - the implementation of the recommendations proposed in the Bates Review

In our last issue (September 1997) we reported on the recommendations made in the Bates Review on how the PFI process should be improved. Among the institutional changes proposed was the disbanding of the Private Finance Panel and its Executive and the setting up of a PFI "Taskforce" within HM Treasury to act as the powerhouse to implement PFI across government. The Taskforce has a policy arm and a projects arm which are now fully up and running.

The Treasury's Private Finance Taskforce is a Public/ Private Partnership at the heart of Whitehall. Our pre-existing policy team has been strengthened by the addition of an internal projects team, made up of private sector deal-doers, giving us real commercial nous. For example, the screening process for potential projects is now much improved as is the ability to give advice on ad hoc issues such as whether a particular proposal is bankable or not. So, as well as making announcements from a public policy perspective, the Treasury can now make informed decisions on commercial matters which will be received with credibility by the market.

A new approach

In its early phases, Government policy on PFI tended to look at the widest possible perspective: getting three thousand civil servants trained in the basics of PFI; universal testing for private finance potential. The new approach is much more focused: the number of PFI hospital projects in England, for example, has been reduced from 43 possibles to 15 probables.

When PFI was at its embryonic stage, we had to undertake a major exercise in changing people's attitudes. Managing change on a huge scale arguably requires somewhat unsubtle measures and therefore, alongside universal testing on all capital procurements, the capital budgets of government departments were cut. However, the "let a thousand flowers bloom" approach clearly created difficulties, particularly in fragmented environments such as health or local government.

Road-testing

One of the primary functions of the Taskforce will be the "road testing" of significant PFI projects. Now that the projects arm of the Taskforce is fully operational, a list of 25-40 "significant projects" is being prepared, in conjunction with other Government departments. This list will be available shortly. In order for a project to be designated "significant" it will have to fall into one of four categories: (i) large; (ii) politically sensitive; (iii) highly replicable; or (iv) projects which are likely to prove problematical. They will need to be a representative group of transactions and there will, of course, be other potentially good deals without direct Taskforce involvement.

Accreditation of advisors

A further recommendation of the Bates Review was the accreditation of advisors such as lawyers and accountants. In a new market such as PFI problems inevitably arise with the standard of advice received from external advisors. Hence the public sector needs to ensure that it is a well informed purchaser of such services. Although Taskforce policy has not yet been set in stone on this issue, it is unlikely that a "full blown" accreditation scheme will be set up in the short term. Such a scheme would take a considerable length of time to establish and would require the "kite marking" of individuals, rather than the firms for which they work. In the short term, updated guidance on the appointment of advisors will be produced and Government will be much more rigorous in taking up references.

Bid costs

The Bates Review also recommended that bid costs should be minimised. Among suggestions made to Malcolm Bates was the reimbursement of tenderers' bid costs in cases where a contract is not awarded by the public sector for reasons not related to the viability of tenders received. The Bates Review stated that the Highways Agency had adopted this approach on some of its schemes. In fact, the reason the Highways Agency included such a clause was to encourage competition around the time of the General Election. The Taskforce is currently reviewing the effect of this recommendation but does not envisage imposing its judgment over that of Departments. However, this is not a green light for public sector parties to be cavalier in making such decisions.

Model contract terms

A further recommendation of the Bates Review was that model PFI contract terms be produced. The Taskforce has recently issued a statement setting out in detail its policy on this point. Rather than promoting a requirement for absolute conformity with a given set of model conditions, which would inevitably have the effect of stripping out potential innovation, it recognises that there is tremendous value to be gained in having a form of contract which can be used as the starting point for further negotiations. The Taskforce's ambition, therefore, is to produce templates for each major sector as well as producing some contract terms applicable across all project types. An announcement will be made shortly on those areas where templates will be produced and a draft standard form of Direct Funding Agreement (between the Government department/other public body and the funders of the private sector body) is currently being worked on which, it is hoped, will shortly be put out to the market for consultation.

Other changes

The establishment of a library within HM Treasury to house relevant PFI documentation is also recommended in the review. In areas such as IT, for example, model terms are already established. The object of this exercise is to bring confidence and predictability to the PFI process so that both sides understand that negotiations will take place within a given set of parameters. The Taskforce is also keen to ensure the quality of conferences and publications on PFI and, to this end, is seeking a private sector partner to run a series of "Taskforce" days in 1998. [Capita Group plc has since been awarded the contract to provide a programme of PFI conferences on behalf of the Taskforce.]

The Taskforce is often asked whether the term "private finance initiative" is still appropriate or whether the term "public/private partnerships" should now be used instead. PFI is, in fact, a sub-set of PPP which can encompass franchising, concessions, joint ventures, privitisations. The Treasury is not being prescriptive. The Taskforce has recently published a new guide to PFI entitled "Partnerships for Prosperity" which sets out PFI in the public/private partnerships context.

So plenty of work is underway. That said we recognise that the success of private finance for public services depends on a flow of good projects, not simply a flow of new processes. Many people have welcomed the Bates review and are convinced by the theoretical strength of what he proposed. We must all now make it work in practice.