RECOMMENDATIONS

19  The contractor failed to deliver the project to the time and quality required. However, the contract and the way it was managed by the Department were effective in transferring design and construction risk to the private sector. This has meant that, while the public sector has lost some of the benefits from the use of the buildings, it has not borne the full cost of making good deficiencies in them. We conclude that the Department did not achieve full value for money in the short to medium term, but did protect its downside position.

20  The NPL project was an early PFI contract. Some lessons that can be drawn from this project have already been captured in guidance published since the contract was signed in mid-1998. There are, however, new lessons to be learnt, and older ones to be reinforced about awarding and managing a fixed-price contract involving a high degree of technical complexity. We make the following recommendations:

a  Technically challenging requirements - To reduce the risk that the Contractor will fail to deliver the required performance, the procurement process for technically challenging requirements should require bidders to demonstrate convincingly that they can satisfy the performance obligations, for example by constructing prototypes.

b  Risk management - Before signing the contract, the Authority should assess the main ways in which the project could go wrong and use this assessment (a) to see whether more needs to be done to reduce risks and (b) confirm that the contract provides adequate incentives for all parties to avoid problems, or cure them if they occur.

c  Risk management - Following the award of the PFI contract, the Department benefited from retaining staff on the project with detailed knowledge of the NPL and the contract. The Authority should retain access to a core of key personnel during the initial post-contract stage of the contract, until the Contractor has begun to deliver the services successfully.

d  Risk management - The concept of partnering can help the public and private sectors to find solutions to issues where they are working together over an extended period. However, the Authority should be prepared to set limits on its partnering role when the Contractor's continued poor performance seriously jeopardises the successful delivery of the project, and, where necessary, re-establish any rights that may have been eroded through its dealings with the Contractor and avoid actions that will inadvertently transfer risk back to the Authority.

e  Risk management - Under normal circumstances, issuing variations in good time is sensible, for example to avoid the cost of installing equipment that would otherwise need to be changed at a later date. But this project demonstrates that refraining from issuing variations, which would have changed the nature of the works, helped the Department successfully avoid counter claims that it shared responsibility for the poor performance of the new facilities.

f  Risk management - Banks may prove reluctant to step in when projects are in difficulties, especially when the physical asset is technically complex or in some other way novel. The Authority should therefore not assume banks' step-in rights are sufficient to ensure that the private sector will deliver the contracted services.

g  Risk management - The Authority should ensure that the payment regimes between the Contractor and its sub-contractors are structured so that the amount left to be earned by a sub-contractor for completing a contract exceeds its cost of doing so.

h  Risk management - As part of its risk planning, the Authority should prepare fallbacks/contingency arrangements so that it is not forced to compromise its contractual position in order to maintain services.

i  Termination - Terminating a contract for reasons of an alleged default by the Contractor is unlikely to be straightforward. Reliance on the threat of termination alone is therefore not an adequate substitute for effective arrangements that confirm, before the contract is signed, that the Contractor can meet its obligations.

j  Termination - If the Authority wants to consider a termination involving default by a Contractor that is a special purpose company, it should consider taking advice on the market value of the Contractor's debt to inform its strategy for negotiating the termination sum.