PFI contracts and savings

Cutbacks iStock 000013353612XSmall 146x219Have you followed the 11 steps to making savings in operational PFI contracts? Mark Gumbley looks at the action authorities can take.

The Guidance

In July 2011, HM Treasury provided guidance in "Making Savings in Operational PFI Contracts" and set out four overriding principles:

  1. PFI projects are complex, long-term arrangements and therefore strategies applicable for saving costs in PFI contracts need careful consideration.
  2. Prior to considering any change to PFI contracts, authorities should ensure that they have a good understanding of their contract’s terms and that they are effectively managing them.
  3. Value for money is key and authorities must consider cost benefit issues relating to risk transfer before making changes.
  4. Authorities should engage commercial, technical and legal advisors in most cases if they change the contract.

These principles remain at the forefront of any thinking about reviewing your PFI contract.

The steps to be followed in any review should be in accordance with the guidance.

  • Check that the existing contract is being managed effectively.
  • Check whether the payment mechanism is being used with effective performance monitoring and payment deductions.
  • Check the insurance cost sharing provisions.
  • Consider opportunities to increase energy efficiency.
  • Review asset usage and scope to optimise management and use of assets.
  • Consider sub-letting or ‘mothballing’ spare capacity (if avoidable costs offer value for money).
  • Review whether the Services specification reflects current requirements and that your organisation is only paying for what it needs. Consider the potential for efficiencies from standardisation, procuring services outside the PFI contract and/or seeking re-pricing through benchmarking or market testing.
  • Share/benchmark/obtain cost information, comparing information with other comparable projects.
  • Consider the costs and benefits of changing the contract.
  • If contract changes are likely to be required, agree suitable cost transparency measures and a variation protocol.
  • Communicate lessons learned with departmental PFUs and other public sector networks.

If you proceed to the point of considering changing the PFI contract, you should follow these six stages:

  1. Consider the costs/benefits of implementing changes to the contract.
  2. Check the scope of the original procurement documentation.
  3. Ensure sufficiency of cost transparency and suitability of variations protocols.
  4. Understand what the current charges are for a service relative to what others are paying for similar services.
  5. Make contact with other authorities, especially those negotiating with the same consortium members and subcontractors.
  6. Check current standard provisions in respect of the amendment being considered.  

How to go about gaining savings

There are, we believe, three key points that come out of the Guidance and which need to be considered by any authority on at least an annual basis:

  1. Are you managing the contract properly?
  2. Do you need all the services and can the assets be worked harder?
  3. Do you need to change the contract?

Mark Gumbley is an associate at DAC Beachcroft. He can be contacted on 0121 698 5354
or by This email address is being protected from spambots. You need JavaScript enabled to view it.. This email address is being protected from spambots. You need JavaScript enabled to view it.