The pFI is here to stay.
That is what the government has said, and what the industry has accepted. And it is why the two principal complaints with the process have to be treated. They are: the enormous amount of money it costs to bid, and the diminishing number of firms that are willing to do so. These are not teething problems; they are inherent in the present system.
As the single most important client in the UK, the government has been able to call all the shots thus far. But now, on the eve of the Labour party conference, there are signs that ministers are starting to listen. So it’s up to the industry to grab this chance and drive through change that is clearly needed if schemes such as the failed £1bn Paddington Health Campus and the delayed Plymouth Hospital are anything to go by.
The industry may already be in continual dialogue with the Treasury, as well as the Department of Health and Department for Education and Skills, but to drive home the changes it needs, it has to make a coherent and practical argument. If bid costs are becoming prohibitive and capacity is strained, the public sector is going to have to be convinced to become a better client, and the design process must be reformed.
Reform is certainly needed. The Major Contractors Group conducted a survey of 13 companies and 57 PFI projects and found that average bid costs on PFI hospital projects reached £11.5m in 2005, although bid costs fell as a proportion of overall project values, from 8% in 2003 to 6% this year. On school projects the figure was £2.4m. Naturally, these rising costs are deterring the industry from getting involved in the PFI.
“I don’t think the government is listening yet,” says John Spanswick, chairman of Bovis Lend Lease and the MCG. But he adds that meetings with the Treasury are continuing, and the campaign to win over the government is gathering momentum. RIBA president Jack Pringle argues that the government cannot afford to ignore this campaign, because at a time of unprecedented levels of public sector investment, it has to help the private sector to get it right.
“We are at an extraordinary moment where we have a capital programme like we haven’t seen since the end of the war,” he says. “We’ve had 20 years of underinvestment. Two years ago when I started on this, I was told that I was wasting my time and that nobody would listen. But now everyone is recognising that if you have PFI, it has to be smart PFI.”
Where the money goes
The prohibitive costs associated with design in PFI are cited by the industry as the greatest deterrent to tendering for projects. The underlying cause of these costs, which are mainly associated with big hospital schemes, has been that three shortlisted bidders are asked to produce detailed designs, which often have to be modified on client request. This can be horribly expensive.
The recommendation, lauded by the RIBA E E as well as by consultant Ian Robertson, the former head of property at the BBC and adviser on Paddington Health Campus, is that the client team appoints a full design team – architect, M&E contractor, structural engineer, quantity surveyor, facilities adviser and workspace designer – at the earliest opportunity.
The idea is that the design team secures “minded-to-grant” planning permission before a preferred bidder is selected, and that full drawings are created before a scheme goes out to tender. According to Robertson, that process would help smaller, local players: “The composition of bidding consortiums can be changed, with local suppliers having greater involvement rather than relying on national providers who have the financial muscle to survive the bidding process but little local allegiance.”
Robertson says that because Westminster council did not start the design process for Pimlico school, its biggest PFI project, until after selecting a shortlist of bidders, a lot of money had already been spent and wasted.
Once selected, the idea is that the preferred bidder will take full responsibility for progressing the design and project through to financial close.
Inevitably, some contractors do not support the idea, because they want to be in charge of design from the outset. Robin Herzberg, managing director of Carillion Private Finance, is among the objectors. He is all for early involvement of the design team, but not at an earlier stage than the contractor: “We think there is merit in not just picking the design team early but the whole consortium. We believe that the builder and the designer should be one integrated team.” As such, the bid period would be shortened and therefore cheaper.
Stephen Ratcliffe, the chief executive of the MCG, agrees: “One thing we don’t want is to revert to the 1960s and 1970s where full design was worked out without the involvement of the contractor, who was just sent in to build it.” What Ratcliffe want is work to standardise designs for similar types of project.
Herzberg says it the approach is already working at the Highways Agency, which has introduced early contractor involvement. The Highways Agency says this promotes better partnering, more scope for innovation, better risk management and better cost estimating and budgeting.
You hear horror stories of huge legal costs between preferred bidder and financial close that not factored into budgets
Stephen Ratcliffe, MCG chief executive
The customer is sometimes wrong
That links into another key problem. The public sector is a variable client, sometimes enlightened, sometimes naive. One of the main problems cited by the industry is that companies are asked to design buildings that the client cannot afford. Ratcliffe says this is particularly true of PFI health schemes.
The argument is that because schemes are procured at local trust level, there is not a high degree of expertise on the client side of the fence. Standardisation of contracts has happened to an extent, but the industry says this is not enough.
Peter Coates, the director of the private finance unit at the Department of Health, is said to understand such problems, but what is the solution? Partnerships for Schools has endeavoured to develop a central school of expertise, but the jury is still out on this programme because it is at an early stage.
Ratcliffe says PFI has to avoid the situation where central government is drafted in at the last minute, when problems have already occurred: “You hear horror stories of huge legal costs between the preferred bidder stage and financial close that just haven’t been factored in to budgets.”
One suggestion for how to make the public sector a better client is to create a panel of about 30 advisers who have worked on successful health schemes in the past. These could then be parachuted into projects across the UK. “There is a huge variation between the abilities of individual councils,” says Tim Stone, chairman of KPMG’s finance group. “People should be systematically sent in, as there are instances where it has happened and really worked.”
Affordability needs to be worked out at a much earlier stage, so that the client does not ask for hundreds of designs only to realise that it cannot actually afford everything on its wishlist.
HBG is a contractor with a lot of experience of PFI schools worth about £60m, and it limits itself to bidding for four or five a year. PFI director Richard Fielder agrees that it would be good if the public sector stuck to “aspirations that are not more than it can afford”. It is on a shortlist of three for the Bristol Building Schools for the Future scheme, which is part PFI.
Bob White, the chairman of Mace, is part of a team that has been asked by the Smith Institute, a left-of-centre think tank with close links to Number 11 Downing Street, to look at ways to improve the PFI process. In particular, White is looking at how to make the public sector a better partner, and believes that the answer is to equip it with high quality private sector advisers who remain on board throughout the process.
Stone says the government as a whole needs to recognise that it is one client with one budget, and that extra work in one area can threaten existing plans in others. He says: “Winning the Olympics means that the government will have to fit it into the overall spending programme. The government is a single customer.”
It is all very well the industry pointing out how it wants PFI to change, but will the government really take its suggestions on board? There are signs that it already is. Sources close to the DoH say that a document is expected from health minister John Hutton before Christmas on how the public sector can work better with the private sector. The National Audit Office is also planning a report on design in PFI, and has spoken to the likes of the RIBA and Robertson, the adviser to Paddington, on the subject.
And the government will be aware of the fact that UK companies have a roving eye. Bovis’ experience in Spain could be worrying: it spent just £250,000 on bidding costs as part of a consortium that was appointed preferred bidder on a £100m hospital scheme in Majadahonda in Madrid in April, just three months after it submitted proposals. Compare that with the costs associated with British PFI hospital scheme. There, the losing bidder for large teaching hospital could be as much as £10m out of pocket – and there are reports of the winning bidder spending as much as £47m between the preferred bidder and reaching financial close stages.
And there are other signs that the industry is beginning to lose its appetite for British PFIs. Look at Plymouth hospital, where two of the three bidders pulled out and the NHS trust has taken the project off the market for a rethink. And would any contractor have bid for the ill-fated Paddington Health Campus if it had gone ahead?
KPMG’s Stone, who has sat on both sides of the table, says that there is now a commitment from the government to address the issues: “There is a real interest in change and working better with the private sector.”
The MCG, along with the Construction Products Association and Construction Industry Council, is hosting a fringe meeting on PFI on Wednesday. The industry looks at though it has won the ear of the government. The public sector needs to reform its ways, but the industry has to be clear on what it wants, too.