Disputes: Making amends in a post-White Fraiser world

Disputes in PFI contracts in the UK have been on the rise for several years now. But following the recommendations of the White Fraiser Report, could things be about to change?

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Talk to almost anyone still involved in the UK PFI experience, and they will be able to reference projects where dissatisfaction and disputes (sometimes formal and in official dispute proceedings) are damaging relationships and making contracts harder to deliver.

“There is a growing number of projects in dispute,” admits one lawyer. He and others agree that the situation is getting worse - and has been for some years now.

Partnerships Bulletin has long been covering this problem, with a particular focus on some of the aggressive behaviours being adopted by some public sector advisors and authorities when attempting to use the contract to make savings.

However, it is not just in these contracts where issues are arising. As projects head towards handback and expiry, contracts are being opened up and areas where partners may have previously thought there was agreement are back on the table for discussion. Questions are emerging: why was this area of management stopped after a few years of the deal, for example; or who has responsibility for looking after this provision?

As one investor puts it with some disappointment, in some cases “battle lines are being drawn”, and this is resulting in both sides of the public-private divide retrenching into fixed positions.

“The fact is that if one party doesn't want to negotiate, you can’t make them,” adds the lawyer.

However, this is where the White Fraiser Report, published earlier this year, is meant to come into play. That document sets out some of the problems facing the market, and offers a number of recommendations designed to improve relationships and help bring projects back on track.

“Investors, FM providers and the public sector are aware of the White Fraiser Report. But they have to work at it and it is about evolving the cultural element,” says one public sector source. “The more people who talk about it, and make sure that everyone knows how the Nolan Principles are applied, it will be better.”

“Shining a light on the issues identified is a good thing and has helped,” says Paul Smith, partner at law firm CMS.

“The White Fraiser Report is balanced and fair,” adds Kevin Hawkins, head of management operations at Kajima Partnerships. “The question is what happens now? There is an opportunity to get it right, and it will be interesting to see what the IPA playbook looks like when it is published.”

While most in the market accept that projects already in a formal dispute process are unlikely to be helped by the Nolan Principles, there is a hope that the White Fraiser recommendations will help guide those where there are difficulties and challenges - and stop them slipping down the slope into full-blown dispute.

“Until the White Fraiser Report, the situation was often portrayed as the private sector trying to get away with something,” says Hawkins. “In reality, there was flexibility over what the public sector wanted, but it has since become what is in the contract: that complacency around what is in the contract has changed.”

Furthermore, it is hoped that the report - which recommends a ‘reset’ opportunity be included within contracts to act as a circuit-breaker for projects heading in a downward spiral - might itself provide a jolt to parties, offering a reminder of the need to collaborate.

“Part of the problem is that the PFI contracts in the way that they are set up don’t inherently promote partnership,” says Amar Qureshi, joint managing director and co-founder of infrastructure consultancy at Agilia Infrastructure Partners. “What PFI set up was a transactional arrangement.

“The question is can you put a behavioural overlay onto what is fundamentally a transactional arrangement? How do you shift from a ‘winner takes all’ approach to an approach that is conducive to making a reasonable return whilst recognising that what is being delivered is a public service. This happens in some instances, but it is despite the contract, not because of it.”

“Sometimes you need to take a helicopter view of the project and the contract,” says Robert Marr, director of asset management at Artelia. “Having an escalation protocol in place will help to get people out of the weeds so that they can inform the settlement.”

He and others agree that these issues can often begin as relatively minor irritations, but can be exacerbated by a lack of action or overly contractual responses, which see them escalate into significant and sometimes almost intractable disagreements.

One solution to this problem could be having an independent advisor to act as the ‘judge’ on existing disputes to bring both sides together.

The PFI market might also be able to learn something from more modern joint venture deals, or even the Lift model in primary healthcare. “Generally, Lift is less acrimonious than PFI - a key part of this is CHP [public agency Community Health Partnerships] having a financial stake and a position on the board,” explains Fulcrum Infrastructure chief executive Sarah Beaumont-Smith. “It ensures fairness and transparency, and means CHP are far more than just a client - they have a clear insight into what is happening and a direct say in key decision making.”

And while she admits there is “more of a contractual standpoint” today than in the past, Beaumont-Smith says it is vital that all sides recognise the need to be flexible. “What was envisaged in a contract at the start may have changed over time. For example the way health is delivered is fundamentally different today: the service delivery model has changed so much.”

She points out that most Lift buildings are now being used far more than when they were originally built, as there are demands for earlier and later openings, plus weekend provision. “It is right to sweat the asset but if you’re changing elements around how the building is run there has to be an acceptance on both sides that it will have an impact on how the asset is managed.”

Such flexibility and willingness to accept changes to contracts can only come from good relationships and an acceptance of the need for collaboration and partnership working - not the adversarial arrangements that Qureshi refers to.

“You cannot put the contract to one side, but you need to think about how it was set up originally and then consider how things have changed,” Beaumont-Smith concludes.

Nonetheless, the public sector source is clear that such changes should not be used by either party to try to manoeuvre out of their original core obligations. “All sides have to make sure they are delivering on what they have talked about and on the promises that have been made,” he says.

In this context, the White Fraiser Report may well be acting as an important reminder to some parties of their fundamental obligations - and the fact that each and every PFI contract is ultimately designed to provide facilities and services to the public, rather than about fighting over specific terms in a contract.

Whatever recommendations are implemented by the IPA, they will need to build on this early momentum to keep parties heading in a more collaborative direction.

Hopes are growing that the agency will put in place the architecture for a disputes resolution forum that will offer a clear structure - as well as some transparency - around how disputes are being settled. “I suspect that there would be support for the IPA pursuing that approach and if the IPA decided to be part of any dispute resolution process then that could be helpful,” says CMS’s Smith.

If a number of projects were to go through this process, it might be painful for those first few, but the outcome could be a more settled market in the long term.