Building on a good idea
3 February 1998
Stephen Cirell and John Bennett say Private Finance Initiative projects have never been easier for local authorities. Stephen Cirell is a partner and John Bennett is a consultant with Eversheds Public Sector.
The Private Finance Initiative (PFI) in the local authority sector has been reinvigorated by the election of the Labour Government.
While PFI was introduced by the former Conservative administration, as far as local authority deals were concerned it had an inauspicious start. Plagued by technical difficulties, insufficient ministerial weight was put behind making it work.
The new Government has seized the opportunities presented by PFI projects and the progress has been extremely good.
The long-term future of this form of procurement of capital intensive services is now secure.
Yet to many local authorities, putting together a PFI deal may be seen as a daunting task. It need not be.
The deal process starts with a 'brainstorming' session by officers and members of a local authority on the particular needs for capital intensive services within that community.
These sessions can identify whole ranges of potential projects which might look to the PFI as a procurement route.
A decision then has to be taken on whether each project will fly and in this respect the 4Ps, a government quango designed to drive forward local authority PFI deals, can help by offering practical advice on proposed projects, their aims and what has worked elsewhere.
The 4Ps is now publishing guides to each of the PFI projects which have already been completed (for example, Harrow LBC, Isle of Wight Council, Dorset County Council) and is also publishing the actual contract documentation used in those projects.
To go to the first stage of a scheme, the local authority needs to appoint its external advisers (or take a formal decision to undertake this work in-house) and prepare an outline business case.
The 4Ps note on 'options appraisal and the outline business case' has now been produced and offers guidance.
The outline business case essentially shows that the local authority has properly thought through all of the issues and has addressed fundamental aspects of the scheme.
Under the new procedures, the outline business case is then presented to the Projects Review Group which is chaired by the Treasury Task Force and looks at all projects.
The 4Ps also attend meetings of this group. If the project is approved and supported by the funding government department, then it will be placed on one of the endorsed lists which are published periodically.
So far two endorsed lists have appeared, in December 1997 and February 1998.
Featuring on the endorsed lists means that the scheme is officially approved and a political commitment has been given by the Government to provide revenue support. Only at this stage can the procurement process commence.
Despite the undoubted advancement of the PFI process over the past couple of years, there are still problems and pitfalls to be avoided. These include continued uncertainty over the security of revenue support from the Government.
As far as central government schemes are concerned, the Treasury has made it clear that the money is guaranteed throughout the life of the project. To date, the Department of the Environment, Transport and the Regions has not felt able to give a similar commitment on local authority expenditure.
The strictness of the legal tests required under the Local Government and Housing Act 1989 and the Capital Finance Regulations 1997 cause problems and leave little room for manoeuvrability in a commercial sense.
This brings into question whether the operation on the ground of the PFI procurement lives up to the aim of it being a 'strategic' form of procurement as opposed to a 'regulated' form of procurement.
In addition, many of the commercial aspects of the deal, such as the extent of risk transfer, whether payments can be stepped or changed, the index used to inflate payments and so on are still uncertain.
It is through the work of the early projects that many of these issues are being addressed and solutions found.
These examples should be passed on in guidance for the benefit of others who follow a similar path at a later stage.
On the brighter side there have been a number of positive initiatives, such as the triple boost announcement made by the Department of the Environment, Transport and the Regions on 19 November 1997.
There were three areas covered in the triple boost. First, extra revenue support available for local authority schemes was raised from £250m to £500m.
Second, there was the introduction of streamlined procedures for the provision of revenue support (as described above, that is, the application to the Projects Review Group and the sealing of approval via the endorsed lists).
And finally, the passing of the Local Government (Contracts) Act 1997 which had the effect of removing the greatest difficulties provided by the ultra vires doctrine.
More guidance is promised from the Government, and the Treasury Task Force has without doubt had a useful effect in focusing on deliverable projects and streamlining the process.
The signs are that there will be many more PFI deals in the local authority sector over coming years.
One particular area of interest is education, where the provision of new schools, schools improvements and the facilitation of the IT systems for schools are all topical.
The first deal signed was Colfox School in Dorset and the success of this project has inspired other authorities to follow a similar route.
Schemes are now becoming larger and more detailed (the Colfox project was a single school) and in this regard Stoke City Council is involved in the procurement of a substantial deal involving over 100 schools.
Aside from the fact that there will be more major PFI projects, there is also a movement towards more public private partnerships in the wider sense.
These involve alliances between the public and private sectors, not necessarily project based, which have the ability to deliver services effectively to local communities.
This is very much in line with the Government's wider promotion of community benefit, through the best value regime.