New Treasury Guidance on Making Savings in Operational PFI Contracts

Introduction

On 25 January 2011, the UK Government issued Guidance on Making Savings in Operational PFI Contracts to assist PFI contract managers across the public sector to identify and implement savings measures. This is the latest in a series of steps taken by the UK Government to reduce costs. Infrastructure UK (IUK) and the Cabinet Office are testing the Guidance and other potential savings measures through a pilot PFI project early in 2011 and the Guidance will be updated following conclusion of the pilot.

The new Guidance contains a number of recommendations to Authority PFI contract managers regarding potential cost savings measures and has implications for investors, sub-contractors and funders involved in PFI contracts.

Context

In the context of the focus on deficit reduction and public spending cuts it is likely that there will be significant pressure on Authorities to demonstrate that they have taken all appropriate steps to achieve cost savings in line with the Guidance. Furthermore, to maximise savings, such measures need to be implemented sooner rather than later. Many Authorities will be actively considering some of these options already. Given that implementation costs (e.g. advisory fees) are likely to be relatively ‘fixed’ in comparison to the value of the individual projects, there may be greater scope for achieving savings on larger projects where implementation costs are less likely to cancel out VfM savings.

The terms of the proposed Voluntary Code of Conduct have yet to be published and will be key. While previous voluntary codes such as the Voluntary Code on Refinancing of Early PFI Projects were generally adopted by private sector participants in the market, despite there being no contractual obligation to share gains, it remains to be seen whether investors take a similar view of the proposed Voluntary Code.

The Guidance itself remains a work in progress at this stage. We will see in due course whether there will be any attempt by policy makers to seek to implement recent calls by the Public Accounts Committee of the House of Commons that Authorities should seek to share in the additional returns generated by PFI investors bundling projects and securing economies of scale across portfolios.

In the meantime, we would recommend that Authorities consider the actions they might take in response to this Guidance by drawing, where required on specialist support and sources of information available to them including: