2.20 Although it is the FM provider which will implement most changes, especially small changes, the SPV usually manages the process. SPVs are paid for the day-to-day management of PFI projects, including staff and other administrative costs, out of the unitary payment agreed when the deal was signed. For most small changes, SPVs simply act as conduits, passing requests for changes from the Authority to the FM provider and back again.
2.21 However, SPVs have increasingly sought to charge additional management fees for processing change requests. Several SPVs, having already imposed a management charge, are now trying to increase it for future changes. Management fees have ranged from two per cent to as much as 25 per cent of the value of the changes, adding up to an estimated £6 million paid in SPV fees for changes made in 2006. SPV fees are rarely specified in the project agreement, although some contracts do contain a provision that "reasonable costs" can be recovered. Partly because of this contractual ambiguity, the attempt to impose management fees has been the subject of disagreements between public sector authorities and SPVs.
"What is your 5% giving us? In actual fact, being derogatory and cynical, all you're doing is acting as a post box between our request for a variation, passing it through the service provider, and then providing it back. So where is the 5%? What value are we getting?" NAO focus group attendee |
2.22 As a matter of principle, SPVs should be entitled to recover the cost of work they are doing in addition to the contracted services, where this cost is actually incurred. However, SPVs have sometimes acted unreasonably in trying to impose management fees for small changes, occasionally employing spurious arguments and not relating fees to work done (Figure 11 overleaf). In one PFI schools project, the SPV refused to process any changes at all until the public sector agreed to pay a five per cent management charge on changes that included maintenance and lifecycle costs, despite the fact that such a charge had not been applied in the first two years of operation. This was resisted by the public sector authority and remains unresolved.13 In a few projects, the SPV percentage has been applied not just to the base cost of the change, but also to lifecycle and maintenance.14 There are also examples of very large fees being added to major changes with no contractual basis and with the SPV refusing to negotiate (Case example 3 overleaf).
"Just because you're getting detail doesn't mean to say you're getting value for money. All you're getting is a price broken down into loads of small prices. But you still don't know whether it's worth it." NAO focus group attendee |
11 | Some reasons given for SPV management fees on small changes have borne little relationship to the work actually done | |
Reason given for charging | Assessment | |
Cost of tendering out the work to sub-contractors | This is not done for the vast majority of changes and, if it is done, is usually carried out by the FM provider rather than the SPV. Moreover, if this cost is incurred, it is often charged separately. | |
Need to consider the change and that it can be implemented under the Project Agreement | In practice, this is very rarely an issue for all but a handful of complex changes. 82 per cent of changes under PFI have a value of under £5,000. | |
Need to evaluate lifecycle and risk implications | Risk can be an issue, but in practice few SPVs need to consider it for small works. 81 per cent of changes in 2006 did not attract lifecycle charges. | |
Cost of re-running the financial model | Nearly all changes are paid for through a lump sum payment. Although ongoing maintenance and lifecycle payments may be added to the annual charge and require a change in the financial model, most SPVs combine such changes and re-run the financial model once or twice a year. updates to the financial model should be a regular occurrence throughout the life of a PFI deal and SPVs should already be resourced sufficiently through the annual charge paid by an Authority to undertake such activity. | |
Source: National Audit Office | ||
CASE EXAMPLE 3 |
Avon & Somerset courts An extra 15 per cent was charged by the SPV for a major change requested by HM Courts in the Avon & Somerset courts deal. When the Authority asked the SPV where the contract stated that a fee could be charged, the SPV responded by arguing that the contract did not specify that it could not be charged. It told the Authority that this was a "take-it-or-leave-it" position. In the end, the Authority decided to pay the fee as it needed the change to be made and could not afford to delay any further. It had already spent time negotiating a substantial reduction to the capital and lifecycle costs. |
2.23 In the latest version of guidance to authorities on the standardisation of PFI contracts, the Treasury has recommended that the proper resourcing of contractors to provide an effective change management service should be a part of the specification set at financial close and that there should then be no additional SPV fees for individual changes, unless these are particularly complex.
2.24 The advisory bodies, 4ps and PUK, are working with public sector authorities managing existing PFI deals that were agreed without the benefit of the latest standard form guidance. It is too early to say how far they will be able to reduce or eliminate SPV fees, however, we have identified an instance where this has happened (Case example 4).
CASE EXAMPLE 4 |
Blackburn hospital A fee of 8.5 per cent was charged by the SPV on all changes at the PFI hospital in Blackburn, which became operational in 2005. In 2007 the hospital began implementing its "meeting patients' needs" programme which involves considerable changes to the estate. The hospital used this as an opportunity to renegotiate the SPV fee. Changes over £5,000 now attract a fee based on a sliding scale from four per cent to 8.5 per cent; the hospital is seeking to bundle changes together thus attracting the lower fee. In addition the SPV has agreed that it should never have charged a fee on changes under £5,000 and has repaid £17,000 to the hospital. |