Are you being served?

A recent survey into operational contracts gave PFI a clean bill of health. BSA’s Norman Rose discusses

The good news is that PFI is alive and well. That is the principal finding of a survey carried out by BSA and KPMG which was published last month. The survey covered 76 service companies involved in PFI and is the first to look at how PFI contracts work when operational services have commenced. It followed informal discussions between BSA and HM Treasury, who enquired about whether there was any empirical evidence to show whether PFI schemes were delivering better services to users. Since the only previous surveys had concentrated on the construction and financial aspects of PFI projects this seemed an ideal opportunity to collect and examine evidence and to put to rest the hearsay and tittle-tattle which creeps into the national and trade press. We invited KPMG to join with us in undertaking this task, with particular responsibility for running and processing the survey which was undertaken between late July and early September.

It is not possible to deal with all the findings in detail in this article so I shall concentrate on the three most important conclusions.

The results of the survey confirmed what we had always believed but with greater consistency than we could have imagined. The key messages are that -

• Operational PFI is working
• Services are being delivered at or above the level required in service level agreements
• Real partnerships have been formed between private and public sector parties to the contract.

It is worth looking at these major findings in more detail.

The operational performance findings were particularly positive (see chart below) with over 98% of contract managers showing that their contracts were meeting the SLAs and over 70% exceeding them (see Table 1). These findings have to be taken in the context of contracts which have been subject to hard negotiations by both public and private sector teams and which have met HM Treasury's criteria on value for money. Not surprisingly, payment mechanisms were not deemed to provide any stimulus or incentive to outperform SLAs or to introduce innovative service delivery. This clearly needs to be addressed if PFI is not to become a 'vehicle for mediocrity'.

On the other hand, while it is encouraging that over 75% of those surveyed stated that their contracts were currently profitable and over 60% that they had always been so, a worryingly large percentage (24%) indicated that their contracts are not currently profitable. This leaves a number of unanswered questions.

Much has been said about deductions under PFI service contracts. The survey demonstrated that deductions are not significant overall. The level of deductions is in general very low with over 50% of contracts experiencing less than 10 over the duration of service provision (40% less than five). At the top end of the scale, 18% had had more than 60 deductions (see Table 2).

It was not surprising that many service operators felt that the public sector adopted a bureaucratic, legalistic approach to deductions - sometimes for their own sake in order to save money. The survey did not differentiate between deductions for non-performance or non-availability and other deductions. This will be addressed in future surveys.

PFI contract

Surprisingly, there was far more recourse to the contract than one would normally expect with nearly 45% of respondents referring to the contract at least once a week and more than 60% referring to it at least once a month (see Table 3).

This is surprising as the normal expectation is that the contract will only be taken out of the filing cabinet when there is a problem or a dispute. It may be that respondents included the service level agreement as part of the contract and viewed references to that as references to the contract. Whatever the explanation, the contract seems to be a very important reference point for all parties and the survey shows that those contracts which had formal meetings between the parties at least once a week developed the best inter-party relationship. Where there were meetings at least once a week almost two-thirds of respondents rated their relationship with their public sector counterparts as excellent. It will be interesting to explore this further to see whether it is part of a safety feature mechanism within the public sector culture or whether there are real, tangible benefits from increased frequency of formal meetings.


Despite a perception often fuelled by the trade unions that relations between the public and private sectors are strained our survey did not reflect this - emphatically, rather the opposite. This is very good news as it demonstrates a grown-up, progressive attitude between those whose task it is to make the contract work. The issues of deductions and innovation need to be addressed with HM Treasury to change the perception and result. A rigid adherence to contracted, inflexible SLAs could cause a fault line in operational PFI relationships. Finally, over-reliance on contracted terms may create rigidities and legalism within the contract thereby stifling innovation and added improvement in service delivery.

Overall, the conclusion is that ‘relationship management is the key to making PFI work, not the contract’. This is how it should be and how it must remain to deliver the ultimate benefits to the end user and to achieve government's goal of modernised public services. n