Speaking the same language

HM Treasury recently produced a Review of the Competitive Dialogue and a Technical Update on Public Private Partnerships. Both will significantly affect local authorities which have PPP schemes in operation or still in procurement, says Helen Randall.

HM Treasury's Review of the Competitive Dialogue has been in train for 18 months. It includes some sensible suggestions which prudent authorities will want to do anyway, for example, scoping which issues need to be discussed in dialogue, ensuring a realistic schedule of meetings, incorporating time to address internal approval processes and the establishment of close of dialogue procedures before entering procurement.

Interestingly, the guidance suggests there has been inconsistent training on the competitive dialogue which have apparently contributed to what HM Treasury refers to as a "lack of up-skilling in procurement professionals". Clearly therefore, there needs to be better training, preferably carried out by those who have actually gone through a number of competitive dialogue procedures and emerged successfully at the other end.

Ultimately, what the Review does not say is that it is in everyone's interests to make the competitive dialogue procedure more efficient because every pound spent on bidding is a pound less spent on the provision of public services. Those of us who have been involved in the projects industry for some time know that it is in the long-term interests of both the public and the private sectors to run the competitive dialogue procedures productively and efficiently.

Technical Update on Public Private Partnerships

Looking at the Technical Update on Public Private Partnerships, the government has confirmed it remains committed to Public Private Partnerships including those delivered via the Private Finance Initiative and that "such arrangements will continue to play an important role in delivering Britain's future infrastructure".

The first and most significant change for local authorities is a reform of the PFI credit system, which is how central government funds local authorities' PFI projects.

The policies behind the Technical Update will change the way local authority PPPs are funded by central government and are intended to increase the transparency of the government's financial commitments, increase project scrutiny and value for money testing and, in light of movements in funding markets, catch up on those and update the guidance relating to financing.

Under the previous system, PFI credits were 'top-sliced' from Revenue Support Grant within the overall local government Resource Departmental Expenditure Limit (RDL). The 2010 Spending Review ended the PFI credit system with which local government has become familiar over the years. From April next year, individual government departments take on the responsibility for making grant payments for PFI contracts to local authorities. This is likely to increase the hoops that local authorities will need to go through to get their PFI project(s) funded and there may also, be potential for discrepancies in how the grant payments will be administered.

SoPC4 and the principle of standardisation will be retained. Also, PRG (Project Review Group) will be retained to scrutinise PFI and PPP projects, particularly in terms of affordability, value for money, deliverability and readiness to engage the market.

Project-specific derogations

For those authorities hoping that a change of government would bring a relaxation from the time consuming process of obtaining approvals even for project-specific derogations to the standard terms of PFI contracts (SoPC4), there will be a disappointment.

Many of us will be familiar with the situation where just before commercial close often in an attempt to plug an affordability gap, the authority decides to make a capital contribution. Where this happens late in the process, this then raises concerns in relation to equality of treatment and potential breach of European procurement law but also more pragmatically, whether the authority will necessarily obtain value for money by becoming, in effect, an investor at the riskiest stage of the project. Capital contributions paid too early in a project can undermine the basic PFI philosophy that risk should be borne by the party best-placed to bear it, i.e. in the construction phase, this should usually be a private sector consortium which contains an experienced building contractor.

Affordability and value for money

HM Treasury has categorically stated that where an authority is considering making a capital contribution to a project, this now has to be considered as part of the authority's Outline Business Case in both the affordability and value for money assessments and moreover, all proposed capital contributions will be assessed by Infrastructure UK. The issue as to risk is addressed by stating that the overriding principle should be that sponsor equity and private sector debt should absorb all expected losses. Infrastructure UK are unlikely to approve capital contributions which exceed 30% of the value of the capital works.

There is also the announcement of a strand of work called the "development of value for money options for reducing the cost of operational contracts", i.e. variations to operational PFI projects to reduce costs. The ability to negotiate good savings will depend on what provisions there are with regard to refinancing, market testing, benchmarking and replacement of sub-contractors and, equity providers' willingness to come to the table.

Financing

Finally, the Technical Update addresses financing. There is a recommendation that for novel, complex or large projects where the financing package involves a significant proportion of lenders in the market, early lender involvement "in some form" is likely to be appropriate. What the guidance does not address, is the more thorny issue as to how the funders' costs of involvement at an early stage of the project will be paid for. In current times, can the public purse afford to pay the costs of funders' involvement in the early stages of a project, especially where there is likely to be a debt funding competition? The earlier the involvement, the greater the cost which even if amortised over the concession period will, in this difficult economic climate, be subject to public scrutiny. Surely it would be more helpful for local authorities if the guidance were to suggest precisely the level of involvement that funders should have early on and how their costs should be treated? This would maintain a level playing field by setting an industry standard.

The Update looks at debt funding competitions in particular and it is now unambiguously stated that authorities should always reserve the right to require their preferred bidder to run a debt funding competition. The Update exhorts authorities to be "well-informed about the state of the financing market to enable them to make independent judgements about the deliverability of financing terms submitted by bidders".

There are some further mandatory requirements set out in the Update, most of which are common sense such as stating that authorities and their financial advisers should continue to monitor the financial health of critical members of each bidder's supply chain, including sponsors, key sub-contractors and lenders and that the historical PQQ assessments should be updated as required throughout and that authorities should understand and manage the issues arising out of the interest-rates swap process given its importance for overall costings.

Rigorous scrutiny

In summary, these sets of Guidance impose more rigorous scrutiny on local authorities and greater care will be needed to navigate the competitive dialogue and PFI processes to avoid criticism or risk of challenge in these more contentious times.

Helen Randall is Head of Public Sector Commercial and Partner at Trowers & Hamlins.