Project management and the private finance initiative

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Figure 2.2: PFI contracts awarded by government department (1992-2002) Frequency 45 40 35 30 25 20 15 10 5 0 Although existing evidence of the success of PFI is contradictory and inconclusive, it is evident that there is considerable variation between the performance of different projects. Clearly, the use of PFI guarantees neither success nor failure, since, as with any other form of procurement, the performance of any given project is dependent on a range of factors (NAO, 2003b). These factors are discussed in further detail below. 2.3 The importance of project management skills in PFI A number of reports have focused on the most important factors which lead to successful PFI outcomes. For example, a recent National Audit Office report (NAO, 2001) highlighted the key issues which awarding authorities needed to bear in mind when developing and managing relationships with private sector PFI contractors. Based on an analysis of 121 PFI projects let prior to 2000, the study focused on how awarding authorities and contractors were managing the PFI process. The research revealed that PFI projects should be approached in the spirit of partnership, in terms of business understanding and establishing a common vision of working together. Such a partnership must Customs & Excise DCMS DEFRA Dept for Transport DFES DoH DTI DWP FCO GCHQ HM Treasury Home Office Inland Revenue LCD MOD Northern Ireland NS&I ODPM OGC Public Records Office Scotland Wales Department 5 chapter two Managing the private finance initiative Project management and the private finance initiative Frequency Percentage capital value adapted from Dixon et al( forthcoming), and based on OGC data: November 2002 120 100 be established from the start before contracts are let. Moreover, having staff with the right skills is critical to good contract management. Similarly, given that value for money (VFM) is used as a measure of the success of a PFI project, it makes sense to try to understand better what are the key drivers for VFM. Research by Arthur Andersen and Enterprise LSE (2000) for the HM Treasury Taskforce on PFI was undertaken in 1999 to determine what these were, and found that they included: • Risk transfer; • Long-term nature of contracts (including whole life cycle costing); • Use of an output-based specification; • Competition; • Performance measures and incentives; and • Private sector management skills. As a result, the report recommended a greater sharing of experience within the public sector; improved project monitoring; better public sector comparators; and improved 80 60 40 20 0 Percentage capital value
guidance on risk management. By implication, the report also suggested that project management expertise was at the heart of the PFI process. A key issue is that senior management needs to buy into the process. PFI projects are increasingly the norm, but they are also frequently the largest contracts an awarding authority will enter into, and so resources and time need to be made available to handle the process. This was found to be a problem in the report, just as continuity of experience frequently led to lack of planning for future deals 5 . As the report notes (Arthur Andersen/Enterprise LSE 2000; p.39): ‘The size of the market and the ongoing requirement to manage contracts long after signature mean that a critical mass of contract and project management skills and knowledge needs to be retained and utilised in the public sector.’ Ultimately, therefore, the PFI process poses a key project management challenge. This is as a result of issues that include: • The nature of the construction industry. For example, research by Pinder et al. (2003) highlighted the lack of skills to support supply chain management. But, in theory at least, supply chain management should be an important part of the PFI process. • Reconciling the objectives of stakeholders. Different parties within the PFI process will naturally have different, sometimes conflicting objectives. For example, risk will be viewed differently by the public and private sectors. • Scale of projects. The sheer size of some PFI schemes poses problems in terms of people and resource management, and project planning. For example, since 1997 the average value has been between £29 and £43 million (OGC, 2003a). • Relatively immaturity of the PFI market. PFI was introduced in 1992 and as such is still an emerging market. Although it can be argued that the private and public sector skills base has developed, there are key skills deficiencies in the public sector because of skills shortages, ‘churn’ and transfer of staff (NAO, 2001). • Managing relationships. A cornerstone of current thinking on PFI is the idea of a partnership (Arthur Andersen/Enterprise LSE, 2000). This means that managing contractual arrangements and procurement are vital and underpin project management skills generally. • Maintaining and enhancing knowledge and skills. Finally, as mentioned above, the relative immaturity of the market, combined with skills shortages in key areas, also poses project management issues. Mechanisms to retain staff, promote best practice, and train and educate in project management and PFI skills are therefore vital elements in success (HM Treasury, 2003). 2.4 Problems in managing PFI projects The Second Bates Review 6 (Bates, 1999) highlighted the following fundamental areas of weakness in PFI: • Strategic planning; • Project management; • Negotiating (or ‘deal-making’) skills; • Financial disciplines; and • Management of long-term contracts. More particularly, there was a view that staff responsible for managing PFI projects must be equipped with the right skills. For example, currently over £100 billion of public funds is committed to PFI projects, yet the Office of Government Commerce recognises that there are still gaps in the guidance and training on how to manage PFI projects, as distinct from how to negotiate them at the outset (NAO, 2001). Research by Arthur Andersen/Enterprise LSE (2000) also suggested that using private sector skills in PFI was appropriate when there were benefits to be obtained from economies of scale; where the delivery of the service requires non-core skills; and where the private sector is at the cutting edge of service innovation. In a similar vein, a National Audit Office (NAO, 2001) report on successful PFI partnerships pointed out that, in order to manage a long-term PFI contract effectively, contract authorities need to have staff well-versed in skills which include: • Thorough understanding of the project; • Familiarity with the contractual terms and how they are supposed to operate; • Good communication skills; and • Good relationship skills. The report also suggested that: • Authorities need to maintain continuity of staffing between contract procurement and contract management. Moreover, the skills required will differ during the two distinct phases of the project after letting (i.e. design and build and the provision of services). • The project manager needs to have clearly delegated authority and be supported by other staff with the necessary skills to manage the relationship. The number of such staff will depend on the size of the deal. Additionally the authority may choose to establish a distinct contract management unit responsible for all its PFI contracts. • Most authorities considered that their staff in the contract management teams had sufficient skills and experience. But awarding authorities’ responses to the survey also suggested that there was considerable variation in training provided in contract management skills, with some authorities providing little or no training. The report cited two exceptions (out of 121 projects) to the lack of training issue: PRIME and Newcastle Estate. • Staff continuity was also found to be difficult to achieve. In an ideal world the project manager who procures the deal should also manage the contract. Staff transfers can deplete the knowledge store of organisations. The NAO survey showed that 47% of authorities transferred less than a quarter of staff employed on the contract procurement team to the contract management team. Only 14% of authorities transferred more than three-quarters of staff with experience of the project. 5 This problem of continuity was also highlighted in a recent House of Commons Select Committee report (House of Commons Committee on Public Accounts, 2002) which showed in evidence that for the PRIME contract (within both the Department of Works and Pensions and private sector) no-one in the management team was involved in the original deal. 6 This followed the First Review of 1997, which focused on reinvigorating and streamlining the PFI process to speed the implementation of PFI/PPP (Bates, 1997). 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