Services Success in PFI

15 December 2006

The results of a KPMG and BSA survey of operational PFI projects reveals that on the whole PFI has delivered service improvements and is a key contributor to the success of the modernisation of public services. Norman Rose looks behind the survey' s findings

FOR FACILITIES SERVICES COMPANIES, PFI CONTRACTS represent the largest opportunities in the market. There are over 700 contracts let, nearly two-thirds of which are operational. It is important, therefore, to know if these contracts and projects are successful and offer good value for money not just for the service provider but for the client, the Government and the end user. A total of 88 reports by the National Audit Office have already examined construction within PFI and have found that projects are being delivered on time and on budget.

So far, there has been little interest in the operational phase of PFI projects and no cross sector survey has been undertaken. Until this year it probably would not have been a worthwhile exercise because there was not enough experience of operational PFIs to provide the necessary critical mass. However, as a result of informal discussions with HM Treasury, the Business Services Association (BSA) agreed to undertake such a survey in conjunction with KPMG between late July and early September across 76 service providers. The results, published in Effectiveness of Operational Contracts in PFI, make interesting reading and show how successful PFI projects are once the new facilities have been built and 'hard' and 'soft' facilities services are under delivery.

Operational performance
Overall, 98 per cent of projects surveyed were meeting their SLAs, and in 71 per cent a higher service was being delivered than specified in the contract. Some 49 per cent of respondents rated the performance of their projects as 'very good' while a further 41 per cent rating them as 'good'. These are excellent findings that confirm the success of service delivery under PFI contracts. With nearly four out of five operators assessing their own performance on a monthly basis and over 90 per cent assessing end user satisfaction, it is clear that they are determined to maintain high standards of service delivery.

It is surprising, therefore, and slightly worrying that nearly a quarter of those surveyed indicated that their projects were not currently profitable. There may be a variety of factors leading to this assessment by project managers but it does point to potential difficulties in the future unless this trend is reversed.

The survey has debunked the myth that service providers are suffering from serious deductions. The survey showed that while over 60 per cent of companies had been the subject of deductions, 40 per cent of them had had less than five. Overall the findings show that deductions do not have a significant financial effect on service contracts, and this means that they are delivering the quality of services the client expects.

However, there were concerns about the way in which public sector clients levy deductions with some respondents taking the view that the approach was highly contractual or viewing deductions as a means of improving the revenue stream. These views could point to the beginning of a fault line that could prove damaging to the future development of PFI. However, it was pleasing that 90 per cent of respondents indicated that the dispute resolution mechanism had not been used since the service contract started.

Some 44 per cent of respondents stated that they referred to the contract at least weekly, and 62 per cent believed that the contract was accurate most of the time in relation to the services to be delivered. While it is easy to understand why the contract should be referred to at the commencement of a contract, these findings point to a possible over-reliance on the contract document throughout the life of a contract. Some 84 of respondents referred to it at least every three months.

Contract variations seem to be reasonably low in PFI service contracts with 45 per cent of contracts experiencing less than ten, and a further 27 per cent between 11 and 40. This is probably well below the normal level of variations on public sector contracts.

Importance of relationships
The survey showed that operational managers tended to have frequent formal meetings with their public sector counterparts. In over half the meetings are weekly and of these, nearly 70 per cent rated their relationship very good. This shows the importance of regular, formal contact which seems to have improved relationships as opposed to those who had regular informal meetings, but it does beg the question of how much time is spent in meetings as opposed to delivering services under the contract?

The survey did not set out to have any case studies but since 60 per cent of responses were from the health and education sectors, it ended up with a good representative sample of contracts from to draw some interesting, if sometimes surprising, comparisons.

The first observation is that those involved in health projects were much more positive than their counterparts in education. In the health sector the ratings of performance as 'very good' and 'good' were 56 per cent and 44 per cent respectively as opposed to 31 per cent and 48 per cent in education. Despite these variances, the question remains why just over half of the projects surveyed rated their performance 'very good' in health, while in education this figure was less than a third.

In the health sector 92 per cent (59 per cent in education) of managers claimed to deliver more than is specified in the contract through operational improvements. End user satisfaction (always or most of the time) is also exceedingly high in health even in comparison with the 72 per cent rating in education. This does a lot to debunk the myths about the failure of PFI to deliver end user satisfaction and thus, by derivation, modernisation of public services, especially in health.

It is an interesting observation - but with no evidence from the survey - that the contracts with more 'soft' service content are proving to deliver better quality services than those without them. This may also be a feature of much larger contracts in the health sector and a more mature market, although both markets - and health in particular - are highly politicised.

Another interesting finding related to performance and end user satisfaction is that in health projects there are more frequent formal meetings between contract managers from both sides (44 per cent at least weekly) compared to education (17 per cent). Another possible correlation is the siting of managers based in the same site as their public sector counterparts (84 per cent in health to 59 per cent in education). In other areas such as the perception of payment mechanisms supporting the contract, having an up-to-date risk profile and clear accountability, the health sector scores consistently higher. These findings merit more detailed research and analysis which will be given to them over the coming weeks.

Lessons
What lessons did we learn from this exercise? The value of personal relationships in making the contracts work came through loud and clear. Sometimes this occurs because of frequent meetings; sometimes because people are housed in the same building.

The spectre of benchmarking hangs over 80 per cent of contracts surveyed, with 60 per cent stipulating a five-year exercise. Only 5 per cent of contracts surveyed had gone through this process. It has the potential to take the eyes of project managers off the delivery ball to concentrate on preparing for the imminent market test and has the potential to sour current good relationships between private and public sector managers. In some instances the contract seems to address this issue less than adequately. Almost inevitably the presumption was that cost would rise putting an additional strain on the present relationship.

Key results
....Operational PFI is working
....Services are being delivered at and sometimes above the level required in SLAs
....Real partnerships have been formed between public and private sector parties to the contracts

....Norman Rose is Director General of the Business Services Association. Effectiveness of Operational Contracts in PFI can be downloaded free from www.kpmg.co.uk/email/ iandg/pfi_report.pdf