You will probably have heard of the Chinese curse: “May you live in interesting times.” The construction industry has been living in interesting times for almost as long as I can remember and they seem to be getting more interesting every day.
Quite apart from the possibilities opened up by the Egan revolution, those involved in private finance initiative projects in the local authority sector are now wrestling with a number of other complex and highly significant issues. One of these is the nature and effect of the best-value regime introduced by the government on 1 April this year. Even more daunting is the way in which it fits into the private finance initiative procurement process (or, perhaps more accurately, the other way round).
To recap, best value is part of legislation concerning local government and it forms the cornerstone of a number of changes. These include new local political structures, a new ethical framework for local government, changes to the electoral system to improve turn-out and proposed powers in relation to the promotion of social, economic and environmental well-being.
Best value is to be delivered in the performance of local services. The main plank of the philosophy is enshrined in section 3(1) of the Local Government Act 1999: “A best value authority must make arrangements to secure continuous improvement in the way in which its functions are exercised, having regard to a combination of economy, efficiency and effectiveness.”
This is very easy to say, but, as always, the devil is in the detail. Precisely how is this to be achieved? The key element of best value is continuous improvement by way of a review process defined in section 5(1) of the council’s functions. The term “functions” includes the internal support functions as well as the public functions exercised by the authority.
To assess whether continuous improvement is being achieved, each best-value function is measured against performance indicators for strategic objectives, cost and efficiency, service delivery outcome and quality, and fair access.
There is a proposal to split performance indicators into three areas:
- General health indicators determined by government
- Major national service indicators in areas such as education, again determined by government
- Local performance indicators determined by local authorities.
Perhaps not surprisingly, some local authorities are concerned about the growing bureaucratic demands of the system.
The outcome of a review process is expressed in the publication of a best-value performance plan, a statutory requirement defined in section 6(1) of the act. The plan, to be published for each financial year, will show:
- The services that an authority will deliver
- How it will deliver those services
- To what level those services are currently delivered
- What level of service the public should expect in future
- The action the council will take to deliver this level of service and the timescale.
A solution is to make the private sector supplier operate under a similar contractual duty to the authority’s duty to secure best value
What of the PFI? It enables the public sector to procure capital-intensive infrastructure projects that might not otherwise be affordable from the public purse. Central to the PFI structure is the notion of the delivery of services by the private sector to the public sector, usually involving the construction of an asset, be that a hospital, road or prison.
The services are monitored over the relevant period by reference to performance standards in the contract and linked to a payment mechanism. If the services fall below standard, payment to the private sector drops accordingly.
Common themes emerge: the council has to provide services to its community, and the private sector is required to provide a service to the public sector procurer. These services are monitored.
The best-value emphasis is on continuous improvement. Traditionally, the emphasis in a PFI project has been on maintaining the level of service, with the possibility of improvement built into the market-testing and benchmarking procedures. Thus, the concept of the improvement of service delivery exists in both.
The key to integrating the PFI into best value is to incorporate best-value service improvement mechanisms and flexibilities into the PFI project structure. The local authority should seek to achieve continuous improvement under a PFI contract by ensuring at the outset that its objectives are clearly set out – something that the private sector partner should insist on. It should also ensure that sufficient flexibility is built into the project agreement to cater for unforeseen circumstances, which are bound to arise over a concession period of, say, 25 years.
One solution is to ensure that the private sector supplier is obliged to operate under a similar contractual duty to the authority’s statutory duty to secure best value.
Consequently, provision should be built into the contract that covers:
- The need to carry out customer satisfaction surveys
- An annual service improvement plan (similar to the requirement on the local authority)
- A commitment from the private sector supplier to benchmark services and charges
- A mechanism to monitor performance
- A change control procedure that sets out how charges will be varied if a client asks for a change
- Who will be responsible for which sort of change, whether that be in relation to the subject matter of the contract or changes in the performance indicators themselves.
As always, ensure that the contract is clear, that good project management is in place and that delivery of good-quality services is encouraged using targets and incentives through the payment mechanism in the contract.
I would like to thank Deborah Ramshaw of the Projects Group at Dickinson Dees for her help with this article. Simon Lewis is a partner at solicitor Dickinson Dees in Newcastle upon Tyne.