10. In our consultations with SPV Owners, we were struck by the differing approaches and outlooks of the various investors. Some SPV Owners clearly approach their role more as the owner of a "financial asset" and others more as the owner of an "industrial asset". There is, of course, a spectrum of outlooks rather than two absolute views, but we use these terms here to broadly describe two different types of approach.
11. Those that have more of a financial asset ownership approach will tend to have 'thin' or lightly resourced SPVs, and be more reliant on self-reporting by the O&M Provider. A number expressed the view that, 'everyone knows that PFIs have thin SPVs as part of the model'. This was asserted almost as if it was an embedded contractual obligation rather than an approach or a choice by the SPV Owner. Thin SPVs can be an effective approach and a reasonable choice but adopting this approach is reliant on the assumption that all aspects of the PFI Contract are working reasonably well. When there are issues or problems, thin SPVs need to be strengthened to deal with those issues or problems. The financial asset ownership approach relies very much on its contractual links to its supply chain and therefore problems are allocated to be owned in the supply chain rather than at SPV level. This was referred to by many we spoke to as the "Teflon tube" approach, with nothing "sticking" at SPV level. This approach can contribute to the frustrations expressed by the public sector (as summarised in the previous section) with respect to issues going unresolved until contractual skirmishing with the supply chain has been resolved - ie the "fight first, fix later" approach. The financial asset ownership approach tends to rely more on this "thin" approach, providing reassurance to Public Authorities, rather than assurance.
12. Those that have more of an industrial asset ownership outlook expressed much greater ownership of issues and the willingness to invest in order to manage and resolve issues. This typically meant putting more resource into SPV management or tackling issues at an SPV level, rather than always relying on resolving matters with the supply chain first. The SPV Owners that expressed these views were by no means stating an altruistic approach, but took greater corporate responsibility for the business they owned with a view to long term business sustainability.
13. Interestingly, those Public Authorities that deal with multiple SPVs were able to clearly define these two different approaches and point to examples of why certain investors fell into each category. It was very apparent to us that Public Authorities are generally much more comfortable dealing with SPV Owners that fall into the "industrial owner" category. Examples given included how very thinly resourced SPVs were effectively excluded from technical discussions on key issues because they lacked sufficient expertise, or thin SPVs dismissing their lead responsibility by categorising it as the responsibility of their O&M Provider. This is not a uniform picture and other SPVs were better resourced, with some clearly having very strong in-house technical expertise. Feedback from O&M Providers reinforced the view that SPV Owners broadly fell into either the "financial owner" or the "industrial owner" category.
14. There are many reasons why differing approaches to SPV management exist, including local resource, investor philosophy, reducing SPV management budgets as an efficiency measure, and well-functioning SPVs not needing significant resource in order to operate efficiently. However, we would recommend that all SPV Owners reflect on the effectiveness of their operating models in light of the following observations, because the case for improvement is clear:
(a) Despite feedback that we received from some consultees representing SPV Owners, we do not believe that it is realistic for SPV Owners to expect to have only a minimal role in the day-to- day operations of a PFI project. The public sector provided us with strong evidence to suggest that (i) Public Authorities are highly appraised of the financial wellbeing of SPV Owners; (ii) the frustrations described in paragraph 14 of Section 1 are growing; (iii) the perception gap on performance highlighted in paragraph 24 of Section 1 should be a concern; (iv) the concerns on self-reporting summarised earlier in this section are real, and (v) there is an inextricable link between the strength of relationships and the level of direct engagement that SPV Owners have with their public sector clients. We noted with interest that those PFI projects where the Public Authority had a seat on the board of the SPV seemed to enjoy greater levels of transparency and a more open approach to resolving operational issues;
(b) Whenever we asked consultees representing Public Authorities to name the SPV Owners and/or the names of the directors of the SPV, substantially all of them did not know. When they were able to name one or more SPV Owner, they typically referred to them as "the funders";
(c) Although all of the consultees representing Public Authorities could name the representative of the Management Services Provider engaged in their project, they often commented that representative had very limited jurisdiction to resolve issues; and
(d) When the relevant Public Authority felt that it was raising a reasonable issue, we were told that the representative of the Management Services Provider sometimes stated that pursuing the issue, even though correct from a contractual perspective, wasn't representative of a partnering approach and that if the issue was pursued further, it would erode the SPV's goodwill when the Public Authority needed some degree of flexibility from the SPV in the future (eg with respect to expedient execution of a variation).