15  In December 2001 (seven months into the deal), the contractor indicated to the Departments that it faced a serious cashflow problem arising from errors in the pricing of its bid, variations to the contract since signature and claims arising out of the procurement process. Mapeley STEPS asked for a substantial cash payment from the Departments for the variations and claims. The Departments rejected that request. Instead, they set up a working group to investigate the position and make recommendations on how best to proceed. The group was chaired by Partnerships UK (PUK), and included NM Rothschild & Co., who had no previous involvement in the deal, as independent commercial advisers to the Departments.6 Rothschild's view was that the Departments had obtained a good deal in terms of the original contract price and that it was in their interests to continue. The Departments accepted this but also recognised the risks of a Mapeley STEPS collapse and asked the working group to consider possible fall-back scenarios.

16  A number of factors have since combined to improve the contractor's financial position. Property management income has increased, largely as a result of changes in the property and financial markets, and Mapeley STEPS' financial management has been strengthened by putting in place new systems and processes and by recruiting key individuals including a director with specific responsibilities for finance. Its shareholders have injected additional short-term funding of £8 million with an annual ongoing commitment of £2 million to £3 million. The Departments recognise that the deal is always likely to be finely balanced and will need to be managed carefully if the contract is to deliver the underlying benefits of the deal.

17  Like other PFI deals, the STEPS contract includes a performance measurement system (PMS) that is intended to incentivise the contractor to perform as required by reducing the contractor's income in the event of poor performance. The system was developed by the Departments and their advisers and supplied to all three shortlisted bidders for their consideration and input. The IT to support the operating system was developed by Mapeley STEPS and it was not practical to fully test it prior to implementation. Neither the contractor nor the Departments could therefore be certain how it would operate in practice.

18  Shortly into the operation of the full system, it became clear to both parties that the PMS was not correctly incentivising Mapeley STEPS. The system was driving all the contractor's resources towards fixing faults at the expense of preventive activity to avoid further problems from occurring. Mapeley STEPS also considered that the system was punitive in certain areas. The Departments disagreed, taking the view that as in other PFI deals the contractor needs to fulfil certain agreed criteria in order to receive its payment. The Departments have told us that the revised version of the PMS that is currently being negotiated would lead to an average monthly deduction of around £121,000. Mapeley STEPS is challenging these potential deductions, but it has made an interim payment for the period April 2001 to September 2003 and has agreed to further monthly deductions on a without prejudice basis, pending the outcome of the review.

19 In any long-term contractual relationship of this kind, a partnership arrangement is essential if a deal is to be a success. In STEPS, a number of key staff members moved on to other jobs very soon after contract signature, leaving only one key member of the original STEPS team still involved in the deal. However, the Departments were aware of the prospective personnel changes for some time before they happened and ensured continuity through succession planning. In the case of the Project Director, a replacement was in post six months before contract signature. There were also a number of senior management changes at Mapeley STEPS shortly after the contract was signed. The deal is still bedding in and, while there have been moves on both sides to work in partnership, this has not yet been fully achieved.