13  Indexation, Market Testing and Benchmarking

In non-HRA Projects the optimal and expected position to be achieved is for the Unitary Charge to comprise only of fixed costs and for all variable and semi variable costs to be funded through rents and service charges.  This position would enable:

(a)  the Unitary Charge to be fixed throughout the concession period thus removing a need for indexation; and

(b)  subject to HCA/PUK consent, the deletion of clause 27 (Market Testing) in HPP.  If all variable and semi variable costs will be covered by rents and service charges which are adjusted under separate provisions in the Project Agreement (see paragraphs 19, 45 and 46 of the Guidance) the Authority would not be paying for soft services through its unitary charge (and may not therefore seek to market test them).  The RSL's responsibilities to the Authority would largely be for hard FM services (not suitable for market testing); any residual soft services to tenants under the PFI project would then be priced by the RSL in the same way as for the rest of its social housing portfolio and would be provided by the RSL as landlord to the tenant under the tenancy arrangements.

Some soft services may nevertheless be included in the Project Agreement - since the Authority has an interest in ensuring the provision of these services to tenants in line with contractual service standards.  If these costs are funded wholly or substantially through the tenancy agreements (and not via the unitary charge) then the Authority may apply (with a full derogation request and explanation) to HCA for these market testing/benchmarking provisions to be removed.  Normally if 80% or over of the cost of soft services are funded through rental/service charge income this will be regarded as being wholly or substantially funded through the tenancy agreements.

If, as may well be the case, an Authority is unable to achieve this optimal position of funding any soft services wholly or substantially through the tenancy agreements and variable and semi variable costs are in fact funded through the Unitary Charge the market testing/benchmarking provisions should be retained as further explained below.  The Authority should take detailed financial advice on any such costs being funded through the Unitary Charge.

If any such soft services covered by such variable or semi variable costs are provided by the RSL or RP who is also the landlord of the tenants it would not be appropriate (and be confusing to tenants) to have a position whereby that RSL or RP is removed in respect of certain services whilst continuing to provide other services and acting as the landlord for tenants.  Furthermore a best value approach to service delivery may be achieved where the same contractor is responsible for all aspects of housing management and facilities management, since it has a vested interest to manage and maintain the housing stock properly in order to mitigate his demand risk (i.e. to avoid void housing stock) and enhance the residual value of the leases.  Consequently, in this scenario it would be more appropriate and acceptable (in the light of guidance set by HM Treasury in Operational Taskforce Note 1: Benchmarking and Market Testing Guidance) to utilise benchmarking rather than market testing provisions.  

Where any services covered by such variable or semi variable costs relate to services delivered by a separate sub-contractor to the RSL or RP landlord then market testing would be more appropriate and should be utilised.

Certain activities undertaken by a RSL or RP (such as voids, joint-working with Authority on regeneration activities (i.e. similar to Change or variation services), tenant consultation and housing advice) may be regarded more as functions or responsibilities of the RSL or RP than as services.  It is not obligatory for these functions to be market tested or benchmarked (even if technically classed as a service under the PFI contract).  Tenancy/housing management services, cleaning and grounds maintenance and for extra care projects hotel and laundry and care support services may be appropriate categories of soft services for market testing or benchmarking.  The practicality of undertaking separate market testing or benchmarking of lower-level individual elements of these soft services should be carefully considered before proposing such an approach.