Open-access content Friday 1st November 2013
The replacement for the Private Finance Initiative, PF2, heralds an entirely new approach to FM for such arrangements. Stephen Holton outlines the changes and their potential impact on the FM industry.
1 November 2013
There are 630 or so PFI schemes in the UK, worth around £300 billion if you take the long-term funding and operating costs into account.
The FM industry's share of this is typically 5 per cent or more on accommodation schemes - perhaps more than £6 billion over the next decades, with the majority being during the next 20 years (published data from HM Treasury shows unitary charges currently running right through to 2048, with the peak up to 2030, dropping after that and then tailing off quite sharply after 2040. So it is not a simple picture).
Yet the chancellor has described PFI as "discredited", announced reform, and since then a new form of PFI called "PF2" has started to emerge. The PF2 pipeline may be small at the moment, but with an election approaching, and an economy to boost, who is to say that PF2 does not become one of the chancellor's options?
So how does this reform affect the FM industry on future PF2 schemes? HM Treasury will shortly publish standard facilities management specification and payment mechanism documents for public consultation. This article provides an insight into these documents and explains which stakeholders will be the winners and losers in the new PF2 race.
Standard specification and payment mechanism
One of the most interesting changes from an FM point of view is the introduction of a standardised services output specification and payment mechanism. This is a significant change for PF2 and is aimed at reducing advisor costs by speeding up the project and creating consistency across projects. This should, eventually, reduce bid costs and consultancy fees for authorities. The payment mechanism would appear to be reasonably similar to the one currently used on schools projects, but the output specification includes some interesting new features.
The new specification is in parts; some parts are intended to be consistent across all projects and all sectors, while others allow for each project or sector to add some specific requirements, and create opportunities for flexibility. The Contractor's plans will become incorporated within the contract documents - an approach that has proved successful on other projects and is becoming more commonplace in the industry. There is also a set of appendices with the detailed lists and catalogues needed to support the specification.
While it is clear there is no intention in the Treasury reform for the risk for the long-term condition of the PF2 building to be watered down, so the vast majority of asset maintenance and replacement remains the Contractor's responsibility. However, a new concept of "minor maintenance" has been introduced, with a two-stage approach. The first allows the public sector project team to consider both the need for flexibility and the resources they have available to provide minor maintenance at the start of the project, before procurement begins.
At this point the Authority can decide to keep certain activities in-house, which in PF2 are called "Authority Maintenance Obligations". This list can include responsibility for PAT Testing, interior wall finishes, and a range of minor, low-skill maintenance tasks that a typical caretaker, handyman or janitor might be capable of delivering.
The second opportunity for "minor maintenance" flexibility is through a process that PF2 calls "Elective Services" - these are services that the public sector body might want to buy from the PF2 provider from time to time, but does not want to commit to for the whole 25-year term. The services envisaged can be services that extend the standard hard FM provision - such as external window cleaning, or provision of grounds maintenance services, but might also include services that they have decided are Authority maintenance obligations. At first glance that might seem confusing, but in practice it is quite straightforward and is best explained by an example.
School A has trained their caretaker to carry out PAT testing as part of his routine duties. When School A enters the PF2 process, they retain PAT Testing as one of the "Authority Maintenance Obligations" - so they can carry on as they have in the past. The bidder does not have to include the risk of the number of PAT items within their bi, which keeps risk and costs down. However, the PF2 Project Team also want to create flexibility by including PAT Testing in the Elective Services, so the bidders provide a firm price based on a set number of PAT items, with a rate for additional items on a per item basis.
In due course the School reviews the provision of PAT testing; they now have a choice - they can ask the PF2 provider to provide PAT testing at the price agreed (with inflation), OR they can go to the market and find another provider, who may or may not be cheaper, or they can keep using their own staff.
It is important Authorities approach this flexibility in a sensible and reasonable manner. If the Authority has no intention of ever procuring some services from the PF2 provider, they should be excluded to avoid wasting bidders' time calculating prices. Otherwise bidders could find themselves having to price extensive "wish list" catalogues that are never actually used.
The other main changes announced for PF2 are:
Hard FM: Remains a key part of the services provided under the PF2 contract, but will be limited to those specifically necessary to maintain the integrity of the building, and where opportunities exist for certain "minor maintenance" tasks to be undertaken by the Authority, these should be taken. The PF2 objective for this change is to reduce costs by avoiding duplication, and by reducing risk to the Contractor for costs that he cannot easily control, at the same time creating maximum flexibility for the Authority.
Soft FM: The PF2 assumption is that soft FM services, such as cleaning, security and catering will be excluded, with an approach taken to address any interface issues. There is the potential for some services to be provided by the PFI FM provider on a flexible basis based on a catalogue of prices, or through separate agreement, but in reality the provision of soft FM services on PF2 contracts will be limited, other than in exceptional cases.
Life cycle: While life cycle risk still remains with the Contractor, a more "open book" approach is required, with an independent review undertaken every five years to identify if any surplus exists in the life cycle fund. Any surplus is held in the fund and then shared at the end of the contract between the Contractor and the Authority. Linked to this is an opportunity for the Authority to relax hand-back conditions towards the end of the contract, meaning that decisions can be taken on further investment in the building on a consensual basis. With any savings shared, this avoids money being wasted on buildings that are no longer required, or will be significantly remodelled.
PF2 winners and losers
From the Authority side the PF2 reforms should provide more flexibility, particularly around soft services, less commitment to services they are not sure they want, and if the reforms achieve their real objectives - lower unitary charges. But they will need to conform more to Treasury expectations, which will mean more changes for some sectors, such as hospitals, than for others. However, the Authority's contract managers should anticipate greater complexity, since they will need to manage both the PF2 provider, their soft service providers and in-house staff. There will be no more PFI "one stop shop" for FM Services under PF2.
For the advisor community, there will be less opportunity to create individual FM documents for each PF2, but there will still be a reasonable opportunity to ensure the new standard documents are suitable for their client, and to apply flexibility in the most appropriate way.
For the PFI and FM industry the losers will be the soft service divisions of the major FM service providers, whose opportunity in PFI has largely disappeared. here will still be opportunities to provide soft services, but not under the PF2 banner, which opens the door to those smaller local SME cleaning companies and others to bid for soft services at PF2 buildings; but they will need to have their eyes open for any potential interface risks.
For hard FM providers the majority of the scope is still intact, but they will need to adapt to the greater flexibility demanded and there may be more pressure on prices as a result. The other potential losers will be whoever holds the life cycle fund; while the lucrative funding of the past has largely disappeared, the greater transparency and scrutiny of life cyle costs under PF2 will increase their costs and reduce their margins; this will probably mean that the fund is more routinely transferred to the FM provider.
As for end users working in PF2 buildings, while they will still have the benefit of a new building with good levels of asset maintenance, soft services will change less and so their day-to-day experience may not change as much as it would under PFI.
So, will these reforms achieve their objectives? Will the industry still want to bid for PF2 projects?
It could be argued that without significant reform PFI had such bad press that it was effectively finished, so PF2 will need to show results or it will go the same way. Unfortunately, with such a small pipeline it will take some years before we really know. For the FM sector, the days of high profit PFIs are long gone, but surely the security of a 25-year contract, provided it will generate a competitive margin, must still be attractive.
Want to have your say? Look out for the consultation documents being made available on the Treasury website and provide feedback. (www.gov.uk/government/organisations/hm-treasury)
Stephen Holton is a partner at Gardiner and Theobald. He has extensive experience of PFI projects and documentation, both during negotiation and operation, and recently advised on the City of Glasgow College procured under the Scottish 'NPD' PFI model.