The issues involved in Surrey's first local authority residential care PFI deal

Jonathan Beckitt describes the issues involved in the first local authority residential care PFI deal In March 1998 Surrey County Council and Anchor Trust signed a contract for the long-term provision of elderly care services in Surrey. This is the first such scheme in the country to have been procured via the private finance initiative. Cameron McKenna acted as advisers to Surrey County Council on this deal.

Background to the project
As with all local authorities Surrey County Council is required, under the National Assistance Act 1948, to arrange for residential accommodation for elderly residents unable to afford private care.

Prior to signing the agreement with Anchor Trust, the Council fulfiled this obligation by providing approximately
1600 places at 33 residential care homes across the county. However, 17 of these homes were in need of significant capital investment if they were to avoid eventual closure. The agreement with Anchor Trust has meant that Anchor Trust has taken over responsibility for the management and operation of these 17 homes and has agreed to rebuild, renovate, refurbish or dispose of these properties in a manner set down in the agreement, so as to meet the registration standards set down for residential care homes in the Registered Homes Act 1984. The primary purpose of the transaction, therefore, has been to ensure the continued delivery of good quality residential care services for elderly people by developing a long-term
“partnership” arrangement with a private sector provider.

Project timetable
The Council developed its strategy during 1996 with the purpose of transferring management and operation of the homes to the private sector. Initially, consideration was given to setting up an Industrial and Provident Society but this was later rejected in favour of a PFI solution.
Proposed changes to the finance regime for local authorities put forward in 1996 had made the PFI option more favourable through the award of a grant from central government to cover the interest payments on the capital element of the expenditure.

The PFI procurement process began in December 1996 with the publication of an advertisement in the Official Journal of the European Community. This was followed by advertisements in various domestic journals in January 1997. The advertisements stated that the Council’s intention was to transfer the 17 homes to one organisation which would:

• provide a residential care service from the homes;
• improve and/or replace the homes in order to offer Good quality care for the residents living at the homes;
• ensure the standards met all registration requirements; and
• deliver the final outcome through a ‘not-for-profit’ organisation.

As a result of the advertisements 98 requests for Information Packs were received. Of these, 18 responses were returned from which a long list of 5 was produced.
Within the Council, a dedicated cross-departmental team was set up to push forward the project at all levels : this included representatives from the care services, property, personnel, finance and legal departments. The external auditors were involved from an early stage and the support of the Council members and of the Chief Executive proved to be vital in maintaining the momentum of the project.

A detailed consultation exercise was undertaken with service users, their carers, staff, trades unions and other professional groups. In order to keep all parties involved as the procurement process advanced a regular newsletter was distributed and staff/trade union consultation groups set up. Once the preferred bidder (Anchor Trust) had been selected, it was brought into this consultation exercise.
Detailed negotiation of the contract took place between November 1997 and March 1998. On account of confidentiality obligations set down therein many of its details may not be publicised. It can be said, however, that the contract is for a period of 20 years and contains provisions for monitoring the service being provided by Anchor Trust. It also includes an option for the Council to terminate the contract in the event of serious non-performance by Anchor Trust.

December 1996 / January 1997
Advertisement seeking expressions of interest published (98 information packs despatched; 18 questionnaires returned);

March 1997
First Invitation to Negotiate issued following evaluation of questionnaires (5 ITNs issued - 4 Housing Associations & 1 plc);

May 1997
Second Invitation to negotiate issued seeking fully costed bids (3 ITNs issued - 2 Housing Associations & 1 plc;

July 1997
Submission of costed bids;

July 1997 - October 1997
Evaluation of bids;

October 1997
Report to Social Services Committee on preferred bidder;

November 1997 - March 1998
Detailed negotiations with preferred bidder;

March 1998
Contract signature;

March 1998
Business transfer.

Legal issues
In terms of legal matters impacting on the scheme, 1997 brought two legislative changes whose aim was to encourage the PFI in the local government sector. The first of these was the Local Government (Contracts) Act 1997.

At the time of Cameron McKenna’s appointment (in February 1997) the Act had not yet become law. Although this piece of legislation has removed much of the uncertainty in relation to vires issues (i.e. whether a local authority has the power to enter into a particular transaction), the Council’s statutory powers (under the National Assistance Act 1948 and the Local Government Act 1972) to implement the project were clearly identified at an early stage. Therefore, even if the legislation had not come into force, we would not have envisaged any difficulty with potential bidders in this area.

We have already made reference to the changes to the financial regime for local authorities designed to encourage PFI transactions. The Local Authorities (Capital Finance) Regulations 1997 provides the framework for the operation of the Capital Finance regulations in relation to “private finance transactions” and Regulation 16 sets out the requirements which must be met for a transaction to qualify as a “private finance transaction”. Towards the end of last year, some technical issues were raised in relation to Regulation 16 as regards the ability of the Council to vary payments to take account of Changes in Circumstance (such as legislative change) and the payment of compensation on the occurrence of certain events of default. These issues were satisfactorily addressed in the Local Authorities (Capital Finance) (Amendment) Regulations 1998.

A further legal issue which needed to be addressed was the requirement for ‘best value’. Section 123 of the Local Government Act 1972 requires that the consideration for disposal of land (owned by the Council) is not less than the best that can reasonably be obtained. In the context of this project, individual leases of each of the 17 homes were to be granted and, in addition, certain of the sites were to be sold and replacement sites to be acquired. In assessing the consideration, the Council took account of the overall costs of provision of the services bearing in mind that the preferred bidder was selected by means of a competitive process, the objective of which was to produce a proposal which was the most economically advantageous to the Council. On this basis, the Council satisfied itself that ‘best value’ had been achieved.

The publication of the Bates Review (the review of PFI which the Labour Government undertook shortly after taking office) coincided with the process for selection of, and negotiations with, the preferred bidder for the project. Happily, in view of the extensive ground work that had already been undertaken by the Council in the planning and implementation of the project, the various project assessment considerations laid down by the Project Review Group (the cross-departmental body set up to review proposed PFI projects) had already been addressed to a greater extent. The Council therefore encountered little difficulty in receiving the requisite endorsement for the project.

Successful conclusion
As a result of the momentum of the project being maintained, the contract was signed within 15 months of the OJEC Notice having been issued which, given that this was the first care services scheme in the country to have been procured via the PFI, is a tribute to the dedication of the project team.

Jonathan Beckitt is a partner in Cameron McKenna’s Property department.