PFI - Constructing the exit
Is now the time to take a ‘Latham approach’ to PFI?
Many industry initiatives, forums and good intentions followed Sir Michael Latham’s ground-breaking ‘Constructing the Team’ report of 1994. with what some may argue has been mixed success. But many of Latham’s guiding principles and recommendations still hold good today and perhaps never more so in the context of PFI.
Although by no means the first report to tackle out-moded methods in the construction and related support industries, the Latham report marked a recognition by its commissioner, the Government, that ineffective, adversarial and fragmented approaches to delivery were costing the industry and its clients dearly.
Put simply, the proposal was to place the client at the core of the process and engender greater teamwork and partnering in order to have better, more cost-effective outcomes.
Why did it matter?
Several of Latham’s key recommendations have clear resonances in today’s world of multi-disciplinary service offerings, encompassing both one-time delivery and ongoing service management:
1. Government need to commitment to becoming a ‘best practice client’;
2. Adoption of less adversarial forms of contract;
3. Partnering in long term contracting relationships;
4. Greater standardisation and integration of contract documents;
5. A specific duty to deal fairly across the supply chain in a spirit of mutual cooperation;
6. Appropriate risk allocation to the parties best able to estimate and carry it; and
7. Conflict avoidance and speedy dispute resolution and adjudication.
All of this with the shared objective of teamwork between industry and client, in a process of continuous improvement requiring openness, trust and perceived mutual benefit.
There have been some six subsequent reports including Sir John Egan’s 1998 report ‘Re-thinking Construction’, one by the NAO in 2001 and again a critical Government report in 2011. Bodies charged with implementation have come, gone or morphed in the intervening period. Starting life in 2002, the Strategic Forum for Construction acted as the key interface between Government and the major construction membership organisations. Re-constituted in 2016, the independent cross-industry body, of which the Construction Industry Council (CIC) is a constituent part, established targets in areas such as procurement and integration, client leadership and commitment to people.
What does this mean for us now?
However chequered and incremental the progress of implementing Latham’s vision has been, two things merit new consideration:
1) It initiated a step-change in approach to construction delivery, addressing the inherent ineffectiveness of its adversarial nature, foreshadowing new forms of design build and management contracting, programme management and the implementation of the NEC3 form of contract - a landscape that continues to evolve.
2) There are clear lessons from its findings which could be usefully learned and carried over into the less mature hard and soft FM services industry, which has itself moved progressively towards integration. This is especially the case where services and construction are inextricably linked, as is the case in PFI contracts.
A call to arms...
If we look at the current situation regarding the approaching expiries of around £290Bn of PFI contracts and the Government’s adopted policy stance, as the client, to seek a different “post-PFI” model for the future, the problem statement is clear; how to de-risk this policy implementation and leverage the latest thinking in performance monitoring, exit preparation and contract replacement in a post-PFI model?
This is where the similarities with the obvious, but no less valuable, principles identified by Latham indicate a potential direction of travel for the PFI industry and for the Government:
The client and its needs, in this case, are one and the same as when Latham addressed the problem, namely the Government.
PFI contracts are, by their very nature, structured as a series of partnerships, albeit in the first instance at the level of capital investment, but then with far wider and longer-term operational implications.
As with construction, there are multiple stakeholders in terms of the Contracting Authorities, the Project Cos, Debt Holders, Facilities Management Providers and oversight bodies. And indeed the end-users.
The simplicity of the problem statement above belies the complexity of the challenge, which calls for a wide range of differing skills and expertise to work collaboratively together, without disrupting day to day ‘business as usual’ activity.
The risk associated with ceasing PFI arrangements is driven not just by the criticality or scale of the infrastructure assets themselves but, in a significant number of cases, by the remaining timescale of the contracts and the ability to intervene, where necessary and at the optimum point in time, to effect the necessary seamless change.
Neither timescales nor Government’s own value for money objectives allow for adversarial or litigious resolutions to those contracts which are either currently underperforming, potentially leading to serious financial exposure to both Government and to investors, or which will eventually fail exit readiness tests if left to run to expiry unchecked. “Doing nothing” is not an option.
What does this imply?
All of the above point to a clear opportunity for the development of a jointly agreed Government and Industry Standard, capturing a best practice approach. This needs to address each stage of the remaining PFI lifecycle in a non-adversarial way: operational assessment; remediation methodology; risk management; hand-back readiness protocols; asset transfer and post-PFI implementation and stabilisation.
At CURSHAW we customarily summarise the objectives of de-risking the implementation of Government PFI exit policy as needing to be ‘E3’ - Efficient, Effective and Equitable. Now is the time for every stakeholder at this critical stage of the PFI journey to act in unison to ensure that those objectives are delivered. As Latham espoused over 25 years ago, an adversarial model simply has no winners.
