PFI SCOTLAND

RECENT DEVELOPMENTS IN PFI

Better protection for pensions in PFI

New HM Treasury guidance "A Fair Deal for Staff Pensions" was announced by the Chief Secretary Alan Milburn on 14 June.

The Statement of Practice on the Treatment of Staff Pensions in Government PFI deals supersedes existing guidance on procurement practices through a new five point action plan:

requiring business contracts to be conditional upon staff being offered ‘broadly comparable’ pension packages by the new employer in a way that guarantees that employees are no worse off when they move from the public sector;
extending these rights for some public sector staff who may be subsequently transferred to another private sector employer or who are involved in integral sub-contracting;
publishing a Statement of Practice of the Government Actuary’s Department on how ‘broad comparability’ will be assessed;
making it a standard requirement before a business contract is signed for a new employer’s pension scheme to allow transferring staff the option of moving their accrued credits into that scheme on a fully protected basis;
ensuring that business deals involving staff transfers will not be signed unless any unresolved employee concerns have been considered by the appropriate Departmental Minister.

These new procurement practices will be introduced and followed by Government Departments and Agencies immediately. We are recommending that other public sector bodies take full stock of the new guidance when negotiating conditions for the transfer of staff. The full text of the Statement of Practice ‘A Fair Deal for Staff Pensions’ and the associated Statement of Practice by the Government Actuary is available from HM Treasury Public Enquiry Unit, 0171 270 4558.

Debate in the Scottish Parliament – 24 June

The first opposition motion to be debated by MSPs was on the Privatisation of Public Services. The motion by Mr Alex Salmond read as follows:-

That the Parliament condemns the privatisation of health, education, transport and other public services through the Private Finance initiative (PFI) and Public Private Partnership (PPP) schemes; notes the mounting body of evidence that PFI and PPP, introduced by the Conservative Government and continued by the Labour Government, are an inefficient and expensive method of funding vital public services which also undermine the pay and conditions of public service staff; calls upon the Scottish Ministers to disclose the annual expenditure commitments associated with each public project including private finance, and the rate of return that private partners receive for the capital that they commit; urges the Scottish Ministers to examine alternatives to such private financing, and calls on the Scottish Ministers to bring forward proposals to introduce Scottish Public Service Trusts.

Minister for Finance, Jack McConnell proposed the following amendment to the motion:-

That the Parliament supports the provision of high quality health, education, transport and other public services; agrees that public/private partnerships will continue to be one of the ways used to increase innovation and investment in public services where this approach represents best value; calls on the Executive to continue to work to improve the operation of public/private partnerships and seek opportunities for new types of partnership and flexible contracts which will allow assets, when appropriate to revert to public sector ownership, and recognises its use in delivering high quality public services while protecting the interests of the community as indicated in the ‘Partnership for Scotland’.

The motion as amended was agreed.

During the course of the debate, Mr McConnell announced a number of changes to Scottish Executive policy on PFI:-

There will now be a stated presumption that surplus land will not be included in public private partnerships, unless it represents value for money to do so;
Protection for the pensions of staff who transfer to the private sector will be extended to transfers made under subsequent contracting rounds and in cases of subcontracting;
For most schools and hospitals it will now be an option in contracts for the assets to revert to public sector ownership at the end of contract periods at no cost to the public sector, and
There will be more financial information on projects made publicly available. This includes making Full Business Cases for Government PFI projects available and publishing information by key sectors on forward financial commitments arising from PFI projects.

Bates II

Edition 4 referred to the second review of PFI by Sir Malcolm Bates, Chairman of Pearl Group - he has been asked to examine the progress made in the delivery of PFI and PPPs by the Government and to recommend any changes to the existing arrangements which could further improve the government’s approach to PPPs. While the review was expected to report in February the outcomes have not yet been published – watch this space!

NAO Report on A74(M)/M74 in Scotland

The NAO has now reported on The Scottish Office contract with Autolink Concessionaires (M6) plc to complete the upgrading of the A74(M)/M74 in Scotland to three-lane motorway and to operate the road until 2027. The report found that The Scottish Office had managed an effective competition for the Ł214 million contract and that the private sector partnership is expected to bring benefits which offset the higher cost of financing the project.

These benefits include construction of the road in around 22 months, compared with an estimated 36 months for a conventionally financed project. Early delivery of the road will increase the cost of the contract for The Scottish Office , but these extra costs are expected to be matched by the additional benefits to road users resulting from advanced completion.

The National Audit Office found that:

Within The Scottish Office specification for a three-lane motorway, bidders had scope for innovation;
As in the first four PFI roads in England, the use of shadow tolls as the payment mechanism for the road creates a risk for Autolink – linked to the volume of traffic – which it cannot manage and which, therefore is likely to have increased the cost of the contract. If a different payment mechanism could be developed it might in future produce a better deal.
The Scottish Office maintained notably good communication and feedback with bidders, while ensuring keen competition throughout the process. The Scottish Office included a second round of bidding which they had not originally expected to need. This maintained competitive tension, thus securing a keener price, but also resulted in additional costs both for The Scottish Office and for bidders.
The successful bidder, Autolink, arranged finance for the deal through a competitive process and used a novel funding structure involving a bond issue to gain access to global capital markets. The competitive way in which the Department procured the road gives assurance that the benefits Autolink obtained from this innovation fed through in lower shadow tolls.
The Scottish Office’s assessment of the value for money of the road was thorough. The net benefit may be somewhat less than the Ł17 million calculated by The Scottish Office, but Autolink’s price can be expected to remain value for money.

The report recommends:

That in future road contracts, Departments should think about how to allow the maximum possible scope for innovation on the part of the private sector;
That Departments continue to look at alternatives to shadow tolls for future privately operated roads;
That where competitive tension can only be maintained by including a second stage of bidding involving parallel negotiations with two bidders, then Departments should consider the case for reimbursing some or all of the losing bidder’s costs if unconditional bids are sought from both;
That Departments evaluate carefully the additional costs and benefits that would arise from having a service provided significantly ahead of schedule;
That Departments should as in this case, invite an independent contractor to participate in the development of the public sector comparator.

All enquiries should be directed to Keith Davis, National Audit Press Office: 0171 798 7400

The M6 DBFO contract covers :

The design, construction and completion of a new motorway to upgrade and realign the existing A74 from Paddy’s Rickle Bridge to Cleughbrae, being approximately 28 km;
The design, construction and completion of a new all purpose road parallel to the New Scottish Motorway for the use of non-motorway and local traffic, using part of the existing A74 roadway, being approximately 28 km; and
The operation and maintenance of the New Scottish Motorway and the sections of the existing motorway currently designated M74 and A74 (M), being in all approximately 90 km.

Taskforce Guidance on Project Agreements - consultation document.

In January the Taskforce issued the latest draft of its ‘Standardisation’ document for final consultation. The result of a widespread consultation process on the contractual issues relating to PFI, this document sets out proposals for a balanced approach to dealing with the key issues that are likely to arise in a wide range of PFI projects. The guidance addresses how such issues should be dealt with in the Contract in a manner that is commercially deliverable and which enables public sector procurers to meet their requirements and obtain best value for money.

The guidance has 3 main objectives :

to promote a common understanding as to what risks are included in the standard PFI project;
to allow consistency of approach and consistency of pricing across a range of similar projects; and
to reduce the cost and time of negotiation by enabling both sides to agree a range of areas that can follow the standard approach without extended negotiations.

The deadline for comments was 12 March and publication of the final document is planned shortly.

This document and other PFI publications are listed at Annex C.

PFI TRAINING

Since launching their Level Three training package towards the end of last year, PricewaterhouseCoopers have updated the information material available on all three levels of PFI training approved by HM Treasury Taskforce, i.e.:-

Level 1: Introductory Course – Is PFI the Right Route?;

Level 2: Intermediate Course – The Step-by-Step PFI Procurement Process; and

Level 3: Specialist Training Modules.

This information includes dates and booking information for courses which have been scheduled to take place in the next few months.

For further information please contact Hilary Smith (Tel: 0171 804 1203) or Nadine McCahill (Tel: 0171 804 1250).

CONGRATULATIONS TO SCOTTISH AWARD WINNERS

We would like to congratulate the Scottish winners in the first PFI Awards, which were organised by The PFI Report. The winners were, in the Education category, Falkirk Council Schools; in Transport, the M6 DBFO (joint winner); and in IT, Highland Council IT Services.



Edition 5	June/July 1999