Labour’s Legacy

15 March 2005

As the nation gears up for the next General Election, Stephen Hoare examines the legacy for facilities management of two terms of New Labour Government. Next month, he will look at what the FM sector wants from the next Parliament

WHEN LABOUR came to power eight years ago, the television doctor and labour peer Lord Winston challenged politicians to do something about Britain’s ailing health service. The UK was spending less as a percentage of GDP than most other EU countries. Waiting lists for vital operations were too long, hospital buildings were crumbling, maintenance was poor and morale was low.

After two terms in power, Labour has managed to rachet up spending on health from 6.8 per cent of GDP to 9 per cent, improving on an EU average of 8 per cent. Last year government spending on health exceeded £100bn and is set to rise further. Along with health Labour invested heavily in public services – schools, prisons, transport, housing, government offices - a renewal largely paid for by the private sector through PFI (Private Finance Initiative).

Started by the Conservatives, PFI was espoused by New Labour who commenced to roll it out as Public Private Partnerships covering the full range of public services. From being one of a range of options, PFI is now the preferred delivery vehicle for improving public services. And with 30 year operating contracts FM has been a major beneficiary, making the UK’s FM industry one of the healthiest in the world. Mike Liddle, chair of the UK chapter of IFMA (The International Facility Management Association) comments: “In spite of two deep recessions the UK’s FM industry is in great shape. It is two years ahead of the USA and we are on a par with Germany and Holland as the leaders of Europe.”

Public sector
PFI is now widely regarded as central to the Government’s reforms for the public sector, and indeed its handling of the macro economy. A string of 30-year FM contracts associated with PFI schemes has brought financial stability to the FM industry while exacting service level agreements that guarantee the quality of ooutsourced services. Norman Rose chairman of the Business Services Association whose 18 corporate members enjoy a combined turnover of £15bn said, “The Government has made it clear that service improvement cannot be addressed without the involvement of the private sector. FM is needed to raise that level of public service. This is about hard FM – people on the ground with mops, buckets and tools doing what is necessary.”

Oliver Jones, sales and marketing director of Carillion, cites health as the shining example. “There’s been around £18bn spent on hospital capital projects in the last eight years. Forty-nine hospital projects completed and another 33 under construction. That’s 50 per cent more on a like-for-like basis than was spent in the previous 12 years. And it’s increasing. The current plan for 2007-2008 is going to be £8bn in that year alone.”

With a turnover of around £2bn split evenly between construction and business services and employing 17,000 staff, Carillion, like many of the biggest FM companies, has grown rich from PFI hospitals, roads, prisons and government buildings. Jones cites Swindon Great Western Hospital and the new GCHQ building as among the jewels in its crown. As Jones explains, FM is a sizeable long-term boost to the balance sheet. “An 800-1000 bed hospital might cost £200m to build but it will result in an FM contract worth £15m a year for the next 30 years.”

Ecovert FM, part of the international services and construction group Bouygues, entered the UK market in 1989 as a utilities company but started its involvement with PFI in 1997, the year Labour came to power. Large integrated FM contracts with the Cabinet Office, Kings College London, West Middlesex and Barnet Hospitals, contribute to a turnover of £55m and a workforce of 1,200. Managing director, Bruno Bodin, believes that PFI is good for the UK and good for the FM industry. “The UK is a buoyant market there is no doubt. It sets an example for Europe by being a very open, innovative and competitive market.”

But there are downsides to PFI as well. The bidding process is expensive and with the tender process up to half a million pounds all but the major players are excluded, creating a two-tier industry of FM giants and the smaller specialist subcontractors. The length of time it takes to deliver a PFI contract also comes in for criticism - two years to contract, a further two years in construction as a minimum before FM kicks in. Norman Rose of the BSA adds his criticism. “PFI is not the be-all-and-end-all. It can take up to seven years to get a PFI contract up and running. It’s a very expensive process.” Add to that the extension of PFI into the far reaches of national and local government where it may be misunderstood or badly handled and problems start surfacing.

Mike Liddle is scathing about the politicians. Rules devised by civil servants are too inflexible, the costings are inaccurate and the service level agreements punitive, he says. “Government has an idea what it should cost to purchase from the FM sector but it’s not realistic. The contract is all about backside covering and 50 per cent of it is what will happen to you if you fail to meet the service level agreement. Classically within every government department they don’t know what they’ve got, where it is, or how it works. And they expect me to do it better than them!”

Tim Boswell MP, treasurer of the All Party Parliamentary Group for Business Services, is more measured. “FM ought to be part of change management rather than a cost centre exercise.”

Another perceived negative is PFI’s impact on labour relations in creating a two-tier workforce as service staff transfer under TUPE to the FM company on protected public sector terms and conditions. Bruno Bodin flags this up as an issue. “The two tier workforce is a political hot potato. You can have people on the same site or in the same company working on different terms and conditions – for example better pensions or holiday entitlement. Ultimately clients will have the biggest say contractually. If the client is prepared to pay for improved conditions compared to the private sector it becomes a contractual issue. In France there is more state interference. It is more regulated, definitely.”

Pensions and immigration are part of the mix. Bodin links the two. The Government and the CBI have announced that they plan to tackle the pensions time bomb by raising the retirement age. Bodin foresees an alternative scenario to an ageing workforce. “If people are not prepared to work beyond the present age of retirement then we will have to solve labour shortages by immigration. Planned immigration is a way of solving labour and skills shortages in the services industry as it has been for nurses in the NHS. ”

Pension savings – not always easy or indeed possible for people on low incomes or who change jobs frequently – are also a matter for concern. The Government could do more to protect the value of pension savings through easing the burden of taxation. As an employer Ecovert FM encourages pensions contributions from all employees. Says Bodin, “We run a contributory pension scheme and we encourage everyone to belong. But at the end of the day it is for the individual to decide.”

Wage levels
Freedom to determine wages is a major part of an FM company’s competitiveness. But with a raft of EU and local legislation such as the minimum wage and minimum hours, and with public sector clients insisting on better terms and conditions for contracted out FM staff as well as having a say over training and the employment of local labour, clearly management itself is a deciding factor in driving profits. Oliver Jones comments: “Where we add value to public sector partnerships is our management expertise, and investment in training and technology. We can train local authority staff and we can bring in expert management.”

Politicians can also shoulder some of the blame for the difficulties and sometimes even the outright failures of privatisation. The rapid rise of MRSA - the antibiotic-resistant killer ‘superbug’ - has been blamed on outsourced hospital cleaning. It is a charge that Bruno Bodin and many others in the industry flatly refute. Bodin comments: “This is not a case of public sector good: private sector bad. The private sector have as good a record as the public MRSA is an issue for all parties. It is a problem we can tackle by better communication, raising awareness, newer and better designed hospitals and the proper training of staff. It is a lot about the personal hygiene of doctors and nurses and FM staff too, obviously.”

But there can be no excuses for botched rail maintenance, the cause of the Hatfield disaster that has resulted in Balfour Beatty and Railtrack executives in court facing charges of corporate manslaughter. Meanwhile Jarvis’ involvement over the failed points and track said to have been the cause of the Potters Bar rail disaster wiped millions from its share value and resulted in the company being relieved of its track maintenance contracts. Clearly PFI carries the potential for great risk as well as great reward.

Regulatory burden
The effect of legislation permeates the FM sector in the shape of EU workforce reforms such as minimum wage and minimum hours and anti-discrimination laws and government policy on taxation, the environment, commercial property and planning have hindered and helped FM in equal measure. So has more regulation been positive or a hindrance to FM?

Tim Boswell MP, the Conservative member for Daventry is pretty sure it has been a burden. “We estimated the total cost of legislation on all sectors of industry as £30 bn. Obviously the service sector will have taken its full share as it accounts for 10 per cent of the UK workforce.”

Boswell believes the jury is out on whether FM companies’ public sector workload is sufficient to compensate for the regulatory burden. He comments: “Investment in public services is good for business. But not all business is automatically profitable.” Oliver Jones agrees. “I think I’d say personally that there has been a significant increase in the number of public employees and bureaucrats in government agencies and quangos over the past eight years. There has been a corresponding increase in red tape – partly from Whitehall and partly from Europe. It makes it tough to be a business person these days.”

But regulation also carries with it business opportunities. The burden of red tape falls just as heavily elsewhere in the private sector with the result that more companies are being driven to outsource non core activities including property portfolios to FM providers. The Norwich Union, high street banks, telecoms and utility companies and the BBC have all gone for outsourced property deals in a big way. Regulation and red tape as much as bottom line profits are behind the trend. Says Jones: “As director of a large company you are responsible for the health and safety of employees and visitors. Penalties for mismanagement are high. Or you can have our people provide the buildings and the services to a guaranteed standard. It’s the reason people consider outsourcing over and above cost benefit.”

Building regulations coupled with the need to improve housing stock and reduce CO2 emissions have put yet more business FM’s way – this time in building maintenance. The Office of the Deputy Prime Minister’s (ODPM) Decent Homes initiative will see billions of pounds channelled into bringing all public housing stock up to the new standard by 2010. The funding is targeted at installing the latest energy saving gas central heating condensing boilers, rewiring and installing new bathrooms and kitchens. The initiative has created plenty of business for building services companies. Powerminster part of the Gleeson group of companies is a specialist M&E contractor. David Bradbury, head of sales comments. “We’re targeting £11m of work a year and have order books worth a further £6m. It’s an historical government intervention to target social and economic regeneration. We are working on major schemes in Barnsley, Doncaster and Bradford upgrading all local authority and housing association housing stock under contract.”

Boosting maintenance, however, has highlighted a major shortcoming in Labour’s record – training. For a government that came to power committed to “education, education, education”, adult training has received remarkably little attention – or funding - until comparatively recently. And the full effect of recent reforms and the long awaited White Paper on adult skills will not be felt for another five years.

Unusually for small to medium sized specialist FM companies, Powerminster has its own training arm and puts training high on the agenda. Bradbury comments: “A lot of companies don’t train and that is why we have skills shortages. It’s the first thing to be cut in a recession. Even in lean times we’ve never stopped employing apprentices or training.” Bradbury has an important message for adult skills Minister, Ivan Lewis, and the Learning and Skills Council. It is no good pumping public money into infrastructure improvements without a corresponding investment in training. “The industry is training now for work that is happening now. With a shortage of skilled plumbers, electricians and other trades I’m not sure the Government’s Decent Homes target of 2010 is deliverable.”

Even bigger than the investment in Decent Homes is the wholesale regeneration of the inner cities. Financed by massive local authority property outsourcing deals, urban renewal is another FM opportunity. Carillion is in the last stages of bidding with Bradford City Council where it is in competition with Mapeley/Accord. Oliver Jones explains why the £615m deal is so important. “We are bidding to take over about 4,000 local authority owned assets and the scope of the contract is a broad based strategic service partnership that will free capital to invest in new public buildings, in urban renewal and in the provision of a range of services from energy management and building repairs to street cleaning and highways maintenance. This is taking FM outsourcing to a new level.”

Limits to efficiency
So what is new Labour’s legacy for the FM industry? Mike Liddle of IFMA says, “The FM industry has got stronger. We no longer represent the ‘let’s go screw them’ attitude that was common in construction companies of 20 years ago. With the emphasis on partnership and a good relationship, FM companies can extend contracts way beyond the original three years.” And PFI? Liddle considers. “After 13 years of the private finance initiative the Government has learned its lessons substantially.”

The BSA’s Norman Rose warns that PFI is levelling off in terms of driving improvement in services. Labouring under a burden of taxation and employment legislation and red tape the industry has reached the limits of efficiency and leanness. This is as good as it gets. Rose warns, “It is not always going to be easy to add value when there is an enormous amount of additional red tape. Are there limits to efficiency? Inevitably!” Bruno Bodin who is also a director of BSA puts it more succinctly. “Every client wants more for less. There are limits to that.”

....Stephen Hoare is a freelance writer