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The intelligent customer

A recent National Audit Office report looked at the lessons to be learned from major PFI projects. Mark Rocca and Kuldip Dhanoya set out the key findings for the public sector.

As part of its ongoing deficit reduction plan the Government has begun a number of initiatives to secure savings from major projects. The latest report from the National Audit Office, The Lessons from PFI and other projects (28 April 2011), encourages the public sector act as a more demanding and intelligent customer, by harnessing government buying power through concerted tactics and tougher negotiation. This means:

  • Collating accurate data: including accurate estimates of time and cost with a view to demonstrating value for money;
  • Securing the skills, capacity and experience: to assess whether the projects represents “a good deal” over the life of the contract;
  • Achieving effective accountability: and project assurance with appropriate empowerment, to ensure only those projects go ahead which will deliver value for money;
  • Being willing to challenge: both the method of procurement and the scope of the deal to ensure it reflects the best commercial outcome.

In the context of ongoing deficit reduction

In January 2011, Infrastructure UK published guidance aimed at local authority contract managers setting out a number of recommendations to help reduce overall project costs (see Making Savings in Operational PFI Contracts). A pilot project at the Queen’s Hospital in Romford is currently testing this guidance with a view to identifying practical measures to reduce ongoing costs.

Lessons from PFI projects – the key findings

The main message from the report is that public sector organisations need to act as “intelligent customers”. The report recommends more effective contract management. This applies across all phases of a capital project, from specifying requirements, negotiating the contract and arranging finance to managing the asset and service delivery.

Key questions for the public sector are:

Is the PFI route justified?

Despite there currently being approximately 700 PFI contracts in the United Kingdom, there is insufficient data to conclude whether use of PFI has led to demonstrably better or worse value for money than other forms of procurement. A key question therefore will be whether the PFI route is properly justified. Greater transparency is also required around investment returns on PFI Schemes, in order to assess whether those returns are proportionate to the risks equity investors are bearing.

Are there adequate skills, capacity and experience?

In some cases the commercial skills of the public sector do not match those of the providers. This can put the former at a disadvantage, both in negotiations and in the management of the contract. Lack of knowledge transfer, both internally within the public sector, or from an external adviser to the client, is also seen as an issue, particularly when those advisers or key members of the negotiation team move on to other projects.

Is there effective accountability and project assurance?

The report highlights the need for ongoing independent scrutiny and challenge to decisions, with projects being regularly reviewed and, if necessary, re-scoped. This would be necessary, for example, if new solutions to the service need emerge or if the project becomes unaffordable. The report also criticises the lack of post contract evaluation, which has meant that good practice and “lessons learnt” have not been sufficiently identified and disseminated amongst the public sector. The report suggests that regular forums, such as those held by NHS Trusts to share experiences in PFI contract management, could be used as a model within other sectors.

Is the process being challenged to secure the best deal?

Finally, the report acknowledges that previously there has been little opportunity for public authorities to secure additional efficiencies during the contract term. The report recommends a collaborative approach to identifying savings, with use of open book accounting of private sector costs. This reinforces recommendations in recent Treasury guidance.

The key recommendations

These are:

  • Data collection: The Major Projects Authority, the Treasury and individual departments should work collaboratively to agree the scope of the required data, who should collect the data and where responsibility for costs should sit. Such data should only be collected where the benefits outweigh the cost and the burden of collection. In particular, procurers must be able to demonstrate that the best commercial deal is being obtained within projects.
  • Alternative procurement methods: The Treasury should also work with individual departments to identify alternative means for delivering infrastructure and FM services, building on the lessons learnt from PFI. Contracts should also allow for the flexible use of assets over the contract period and clear arrangements should be put in place to ensure that any charges levied for additional services are both transparent and equitable.
  • Suitable experience and expertise: This should be secured at both central and local government level to ensure that contractors are robustly challenged both during negotiations and over the contract term. Full transfer of knowledge, within the public sector and as between advisers and the public body, is also recommended.
  • Collaborative working: When projects are both sponsored and funded centrally, but delivered at a local level, the relevant departments should set out, at the outset, the roles and responsibilities of each of the parties and the criteria for central intervention. The Major Projects Authority should prioritise independent project scrutiny by experienced senior individuals, who should be empowered to intervene and, if necessary, recommend the cancellation of a project. Local bodies should also work collaboratively and share best practice, including their individual experiences of securing cost efficiencies in existing contracts.
  • Secure better deals: To ensure better deals, project managers should challenge their existing contracts, be alert to operational changes, market conditions or technological innovations which could assist in maximising value for money. They should also develop an “efficiency plan” for each project, setting out a strategy for securing better value over the life of the project, which should include any scope for sharing benefits from economies of scale.

Mark Rocca is a partner and Kuldip Dhanoya is a senior associate at Nabarro. Mark can be contacted on 0114 279 4259 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it.. Kuldip can be reached on 0114 279 4046 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..