4 - Contractual Governance (Mostly Raw)

8/7/2019 4 - Contractual Governance (Mostly Raw)

1/15

PUBLIC LAW II 2010/11

Part I: Contemporary techniques of governance

B. Contractual Governance

1. Rise and importance

No Public Law course could be complete today without some consideration of the challenges and

opportunities presented by government contract and the contractualisation of services. Promoted by

both Conservative and New Labour Administrations, the policy of outsourcing in part blurs the

public/private sector 'divide'. Private sector notions of contract are also infused into public

administration: the discipline of markets or market mimicking, the individualist ethos of freedom of

choice. Contractual ideas of mutual obligation also inform the details of government policies concerning

the rights and responsibilities of the citizen.

Fundamental to the development is the double-handed role of contract in the public sphere. So what is

identified as a chief building block of systems of governance (see Lecture 1) is also an essential agent of

the fragmentation of the pre-existing framework of government, it being through a contractual model

that the bureaucratic hierarchies and organisational forms previously associated with 'public

administration' have been challenged or subverted. A recurring theme is the close interplay or overlap

of contractual with regulatory forms of governance. Indeed, as a repository for rules, principles and

standards, contract functions as an alternative source of regulation.

The UK is once again a world leader, as illustrated by some massively complicated contractual

arrangements for public projects. Much in the domestic development may also be seen as part of a

broader transnational convergence; one that is most obviously driven by the rise in so many countries of

New Public Management type approaches and by the growing internationalisation of public

procurement practice and procedure. Looking forwards, the advent of the Coalition Government signals

a further major push in this direction

A sense of the huge public and commercial importance of the topic may be gleaned from a 2008 study1

of the public services industry (PSI), i.e. those organisations (private and third sector enterprises) that

are contracted to provide services to the public on behalf of Government or to the Government itself.

Key Points

y Sales by the public services industry (PSI) amounted to 79.4 billion in 2007/08. The largest areafor procurement of services is health, with an estimated 24.2 billion spent in 2007/08. The next

largest categories are social protection (17.9 billion), defence (10.1 billion) and education

(7.3 billion).

1 BERR, The Public Services Industry in the UK (July 2008).


2/15

y The PSI has grown in real terms on average by 5.4% each year since 1995/6 although growth hasbeen slower in recent years.

y This strong growth means that the share the PSI is of total GDP has risen from 4.2% in 1995/6 to5.7% in 2007/8.

Contractual governance

- The challenges and the opportunities that are presented by government contract and theincreased contractualisation of public services.

- Essentially. Were talking about outsourcing or what is sometimes called the public procurementof goods and services

o When the government buys itself things it needs (wide range of goods) Furniture in a government department Aircraft carriers

o The purchase of public services in the sense that the government no longer providesthe service directly but recognises that the service should be provided and turns to

private providers

Care homes for vulnerable elderlyThis development needs to be viewed in some context.

Think of some of the implications of that kind of development.

- Clearly by definition, it blurs the divide between the so called public and private. Its public +private. Compare to regulation which was often public vs. private. Here we're talking about

them joining together via contractual arrangements.

Second, we need to think about how some of the ideas from contract have been infused or brought

inside some of the areas in the public sphere.

- E.g. we classically associate contracts with freedom of choice and now wince we're contractingwith public services there's this idea we should have an element of choice when we for example

access health services or public education.

- We also associate contracts as being largely private and thus not having to conform to marketdisciplines and constitution and from time to time we see experiments in the public sector e.g.

NHS with the idea of contracts to speed things up. E.g. doctor having a choice of which hospital

to use etc

Further aspect you should read up in the textbook (today we're focusing more on commercial side) but

note that broader contractual ideas have also been used by successive governments as a modelling forthe relationshipbetween the state and individuals or certain individuals. The idea of mutual obligation

where the individuals simply can't assume if the individual is in trouble, the state will be there to assist

the individuals. If the individual wants access to that helpe.g. welfare benefits, they have certain

responsibilities/ obligations.


3/15

E.g. if unemployed and you want to claim state support, you have to demonstrate that, if you are able to

do so, you are actively looking for work etc... Sotheres this idea of mutuality drawn from ideas of

contract.

So this idea of use of contracts and contractualisation clearly has some hard edges to it with legal

obligations on one side but is also being seized more broadly in the way public services are shaped and

the role of the state is conceptualised

It's the conservative government under Thatcher which begins to make this serious push down the

contractualisation route. Contracting out is what we're talking about which is the alternative piece of

terminology to outsourcing.

On the one hand, it's a way of delivering public services. On the other hand, it was the way in which the

C's set about deconstructing the pre-existing governmental model. It subverted the old idea that of very

large government departments which were also providers of services and in particular at the area of

local government. Particularly if you went back to the 60s and 70s youll see local government as direct

providers of services and it was through the median of contract that the C's set about breaking that kindof model.

Do note that government contract wasnt created in the 70s and 80s it has long historical roots. Maybe

even since government existed.

Second point to make is to appreciate the close interplay between regulatory governments and

contractual governments. It's all too easy to think about contracting out and something just disappears

from the rubric of public law. It's not like thatas contract is a source of rules. It's the Ts and Cs;through

these, the state authority will still be able to exercise a measure of control and influence on the nature

of the services provided and depending on the level of specification, how those services have been

provided etc.

So contract sits side by side with regulatory power as exercised itself by regulatory agencies as a way the

state can generate rules for private bodies to follow. You may say yes but contract is a negotiation. its

not like the state can stipulate every condition it likes but do remember its a huge business and the PA

is often in a very strong negotiating position and in central governmentyou find models Ts and Cs set

up for officials in all departments to follow.

Looking forward, what we can say is that the use of contract by government is certainly not going to

diminish under coalition government. If anything, there might be an increased emphasis on the use of

contract.

Importance of this in hard practical terms?

As with regulation, studying in the UK is interesting from a comparative point of view. As its a world

leader in regulatory reform, its also a world leader in the use of government contract and the

contractualisation of public services. When you look more closely at it, it's interesting to note that while


4/15

the conservatives got the ball rolling, contractual techniques have been taken further by NL. (Contrasted

to that pendulum swing with regulation)

How can we establish that the UK has been a world leader? One way is to look at the public projects

which have been subjected to contracting out. You can compare the sheer size of these projects with

what's been happening in other countries. E.g. the building of the channel tunnel rail link.Contractualarrangements betweengovernment and contractors, the contractual price being something in excess of

4 billion pounds.

(vas hospital?) in NE London 1 bill pounds

Building of m6 toll road, 485 mill pounds. So a lot of really big infrastructure projects. And most

importantly, the modernization of the London underground. A contractual arrangement designed to last

for some 30 years. Sogovernment and the contractors making arrangements whereby private

contractors would do a complete modernisation of the tube over 30 yrs. mutual obligation set out in

literally 1000s of pages of contractualpaper. 16 billion pounds.

So the UK has really led the way and some countries have followed this.

Important to stress that we're looking at domestic developments but will also be looking at

developments in EU law and indeed there are a further set of rules behind EU laws under the WTO and

GAT hats which are very active in outsourcing and stuff. So the UK is a world leader but we need to view

contractual governance in a broader trend of world development.

Besides fact and figures of individual projects, another way of getting a grasp on this comes from an 08

study commissioned by the treasure on what authors call the public services industry or PSI. PSI is

defined as organisations which might be private or so called TP (charities etc) contracted to provide

services to the public on behalf of the government or the government itself.

They found that in 07/08 (the one financial yr) sales by that industry amounted to almost 80 bill pounds.

The largest area was health at about 25 billion and the next biggest were social protection (he alt to job

training to care for elderly) and then defence and then education. They found that since 95 (period of NL

government basically), it'd been growing over 5% a year. And in 08, it was amounting to about 5.7% of

the GDP. So about 1/16th of the GDP of the country goes into what we're talking about today. The logic

of the coalitiongovernmentmust mean that this will go further. Notice the link in a so called big society.

Charities doing what things previously LA's might've been doing. Implies a further big push in the area.'

2. Potentials and issues

The quest for value for money (VFM) has been at the heart of the pro-contractual development under

successive governments. Reference is naturally made to business expertise and capacity for innovation

and cost-shaving in a competitive environment.


5/15

More particularly, contract is seen as having the potential to enhance managerial and administrative

forms of accountability through specification. The elaboration of the EU Single Market the idea of a

level playing field for would-be government contractors has given matters a further boost (see below).

Paradoxically, however, the use by government of private legal forms may be said to strengthen rather

than weaken the case for arrangement protective of the public interest. As a generation of publiclawyers has come to understand, reconciling desiderata of (a) value for money (protection for the

taxpayer) and (b) process values like fairness, consistency and transparency with (c) precepts

traditionally associated with private autonomy, such as commercial confidentiality, is not easy. Nor

should the propensity of contract to squeeze out political accountability should be glossed over.

Functional limitations (as elaborated in contract theory)

y PresentiationOr bringing the future into the present by the use of contractual terms: planning.

Query: how far can this sensibly go?

y RelationalityEmphasis on the importance of mutual trust and co-operation to the smooth and effective workings of

contractual arrangements

Query: does this not point up a difficulty of government using contact in determinedly instrumental

ways?

Against that background, we need to think about some of the advantages of the development and some

issues that arise from a public law perspective.

One explanation associated with C's is the ideological one;can take a broader view thatindividuals prefer

services and stuff generally provided by pirate sector vs public

But besides the ideological thing there are some more specific rationales that drive this development.

- At the heart of it, is the quest for value for money. The idea that doing things via outsourcingrather than in-house is likely to produce better value for money.

Remember that when we talk about all this, keep in mind the taxpayers interest. These huge

amounts are being dispersed there's a taxpayer interest making sure the sums are paid outproperly and more generallythat we the taxpayer are getting a good deal. There are various

argumentsthat are put forward in favourof outsourcing as, in broad terms, producing better

value for money.

o Ideas of business expertise and capacity for innovation. cost shavings in a competitiveenvironment and certainly under the C's a concern to sidestep the strength of the trade

unions in the public sector (comparative strength rather)


6/15

Are these value for money arguments realised when you look at it in practice though?

- It's also been that (the idea of contract as a tool for delivering services) is advocated as beingable toenhance managerial and administrative accountability. Argument here is that if you are

going to proceed down the road of contract, clearly to some extent, you have to specify what

you are contracting for. Whats the level of service, how is it going to be delivered, at what price

etc...

So the argument goes that by writing things down, it then becomes much easier to hold people

to account for the level and quality of delivery.

- The other big set of rationales is very much bound up with the EU single market. The idea thatacross the single market, we should be creating a level playing field for government contractors.

So it's not just domestic drives but also EU.(separate section on this later)

So these are arguments in favour of this general development. Clearly though it raises some key issues

- Some commentators have argues that the use by government of private legal forms in the guiseof contract far from weakening the case, actually underscores the case, for very careful

arrangements protective of the public interest. (argument goes that public lawyers should be

looking even more closely at this sort of arrangement rather than shying away)

- Tensions; value for money protection of taxpayer concur. Weve also got issues of processvalues. If we're going down this route, we need to think about issues of fairness, consistency and

transparency in most obviously the bidding process. if we're going to contract out, what are the

rules on contracting out going to be?

-

And if there is one area that one associates with the potential for corruption, governmentcontract is perhaps it. We're thinking here in terms of protecting private parties so thatall

private parties get a affair chance to get in on the business and also concerned bat protecting

the taxpayer and to keep our political culture relatively clean.

- We've also got issues with the adequate protection for the beneficiaries. The TP beneficiaries, ifwere going to use contract as a ay to deliver public services, what arrangements are we going to

have to make sure the users of these pub serves are properly treated.

privity of contract - leads to significant issues arising there.

- So there's this tension as soon as you get into contract you get the need for commercialconfidentiality. How do you balance that (protect trade secrets etc) without the concernsmentioned earlier? The other point to note is that you might say there were gains and losses in

terms of accountability. We can see something as a base for managerial accountaibility but just

like privatisation, contracting out undermines political accountability most obviously in the form

of ministerial actability?

There were 2 buzzwords that come from contract theory that you need to be thinking about when you

look at how all this works in practice. (Functional limitations as elaborated in contract theory)


7/15

1. Presentiation (Present iation)

What are you doing when you make a contract to deliver services/build something over a period of

time? It's the idea of contract of 'bringing the future into the present'. Through the Ts and Cs, the

parties have tried to specific whats going to happen in the future.

Contract theorists ask how far can presentation sensibly go?How far is it reasonably possible to specify

in a contract we make today what's going to happen over a period of time. The longer the period and

the more complex the subject matter, the more complex it'd be to write it all into the contract.

So this is touching on a functional limitation of contracts; there's only so far it can sensibly go. May just

have to build in more variation clauses. But of course the more of those, the less certainty in the

contract, more difficult to assess price at the outset etc...

Clearly bears directly on the use of contracting to do some of these huge infrastructure projects. e.g.

tube. How can you possibly set out in a document what the contractual obligations are going to be over

a 30 year period.And there its not just about new trains, its retunelling, relaying track etc... and a lot ofthe environment is uncertain/unknown

2. Relationality (Relation ality)

So contract theorists say contract tray works well where it's created or helped to create a sense of

mutual trust and cooperationbetween parties and tends to be a less effective tool where there aren't

these elements betweenthe parties

2 examples where this will happen

1. Government seeks to impose contractual type ideas on recipient of welfare benefits for example. This

might look like a contractual form but very one sided in thatitsreally the governmentpushing this idea of

contract and some of the recipients may not be willing

2. The case illustrated by the tube. What happens if central government imposes on local government a

requirement to go down this route when actually local government doesn't want to go down this route?

So in that case, NL government under Blair forced the (old) labour administration (ken livingston) to go

down this route. The thenLondonadministration was forced to enter into these contractual

arrangements with the private contractors. Right from the outset they were picking holes in each other.

Never got to be mutual trust and the contracts weren't working smoothly. There were battlegrounds

from day one. Important when you think of contracts as a part of government policy so we need to think

about the consequences

consider 3 main aspects;

1. elements of Europeanisation in all of this2. contract compliance or the use of contract by government as a level to achieve other policy

objectives


8/15

3. (PPP and PFI)public private partnerships and the public finance initiative. real set of instrumentspushed by Gordon brown when he was chancellor of the exchequer so its very much associated

with NL government.

3. Outsourcing (public procurement): Europeanisation

An activity estimated by the European Commission to amount to 15% of Member States total GDP

Today, this is the subject of a detailed legal framework with a view to public contracts being awarded in

an open, fair and transparent manner. It has as policy rationales:

y the elimination of discrimination on national groundsy economic efficiency and European competitiveness in the global markety VFM for awarding authoritiesy anti-corruption

Note: (a) the paradox of burgeoning (growing/flourishing) regulation in the cause of market

liberalisation; (b) how the framework (which is set out domestically in statutory instruments) sits

alongside all those common law rules on contractual formation and termination etc that you studied last

year.

The pathway model

Award procedures

y open procedure all interested firms being allowed to tendery restricted procedure tenders being invited from a list of firms drawn up by the authorityy negotiated procedure the contractual terms being negotiated with chosen contractors, the use

of which has however been strictly confined precisely because of the informality

y competitive dialogue procedure providing space for discussions with suppliers to developsuitable solutions, on which chosen bidders are then invited to tender.

Award stage [simplified version]

(1) ... a contracting authority shall award a public contract on the basis of the offer which

(a) is the most economically advantageous from the point of view of the contracting authority; or (b)

offers the lowest price.

(2) A contracting authority shall use criteria linked to the subject matter of the contract to

determine that an offer is the most economically advantageous including quality, price, technical

merit, aesthetic and functional characteristics, environmental characteristics, running costs, cost

effectiveness, after sales service, technical assistance, delivery date and delivery period and period

of completion.


9/15

(3) Where a contracting authority intends to award a public contract on the basis of the offer which

is the most economically advantageous it shall state the weighting which it gives to each of the

criteria chosen in the contract notice or in the contract documents . . .

(4) When stating the weightings referred to in paragraph (3), a contracting authority may give the

weightings a range and specify a minimum and maximum weighting where it considers itappropriate in view of the subject matter of the contract.

(5) Where, in the opinion of the contracting authority, it is not possible to provide weightings for the

criteria referred to in paragraph (3) on objective grounds, the contracting authority shall indicate the

criteria in descending order of importance in the contract notice or contract documents . . .

(6) If an offer for a public contract is abnormally low the contracting authority may reject that offer

but only if it has (a) requested in writing an explanation . . . (b) taken account of the evidence

provided in response . . . and (c) subsequently verified the offer . . . being abnormally low with the

economic operator . . .

Notes:

The E commission has long been interested in regulating this general activity. In addition to the domestic

rules and regulations, there is a very detailed framework produced at European level with a view to

making sure government contracts are awarded in a fair and transparent way. So the rules regulate how

the bidding process is conducted.

Why has the EC really pushed this agenda? It's sort of the same reaseons we find at national level but

there are some European connotations to it.

- Elimination of discrimination on national grounds; if this is a big market (as it is in all countries)and you are concerned to promote a good working internal market, you want to stop the

tradition of authorities contracting with local firms. (the pro-national way of doing things)

Linked to this is the idea that opening it all up will generate better competitive discipline inside

the internal market and in turn promote economic efficiency and European competitiveness in

the global market. Again it's about value for money. The idea that if Britishgovernments can

procure equipment of better value from a non-national firm that'll be encouraged.

Anti-corruption (think Sicily)

What we have as a consequence of this is a very detailed framework. Were emphasizing this because

the effect is an increase in cost. There's a lot of paperwork generated by this legal framework. So the

question is whether the administrative cost of it is worth it at the end of the day. This is not a cost free

enterprise by definition. What is the paradox? Clearly the commission is trying to keep the market

liberalised but to achieve this, they've had to go down the route of very detailed framework.

Typically, this is brought in to our own domestic system through statutory instruments. EU makes its

own directives this is put into effect at domestic level through a whole series of SI's.


10/15

Some key features of (the regulatory framework)

- We can understand where the EC is coming from but we've got a balance to strike. Imposing thisregulatory framework is going to be costly. Generate a lot of paperwork. What the commission

is going to do is create a framework dealing with a huge range of contracts. (e.g. to supply

knives and forks to a government canteen to complicated IT programs)- So within this erg framework there's an attempt to tailor the legal requirements of diff types of

contracts

The 2 big features

1. That the framework works on the basis that there a number of different pathways in making acontract. If you're going to go down the bidding process, depending on the type of contract you

are dealing with, there'll be more or less requirements to follow and essentially what has to

happen is that the PA will have to choose from a no of different procedures depending on the

type of contract it's making. These range all the way from on the one hand the open procedure

(where you place an ad in the relevant trade press and all interested firms are invited to tender

and you must listen to all those firms) to at the other end, what is called competitive dialogue

procedure where you are involved in a very complex contract where you the PA may not be able

to specify a solution in advance, you are allowed to enter into a dialogue with a few chosen

firms excluding all the others and then you make the decision from those few firms. (people

would have to research solutions and there's a lot of commercial confidentiality and hence the

basis for this) It's clear that the features of the competitive dialogue process mean it isnt that

competitive as you only select 2-3 firms to do it with.

2. The detailed rules we find at the actual award stage. How does the PA decide who wins? Whatwe see is a detailed set of rules for how the PA is to decide who wins.

o This regulatory framework in a number of ways structures and limits the PA's discretion.Limited in a number of ways and it may be called on to publicly justify the basis on

which it made the award.

in practice, it's almost always economically advantageous to use this framework as it allows you to

consider a whole range of things.

However, you have to specify in advance the weightageyou are giving to the different characteristics

and you are not allowed to depart from that criteria. So under the framework, you make a decision and

you then come under obligations to justify your decision. Must give reasons if asked to any disappointedbidder including sufficient detail for them to understand how that weightage is applied.

That model is surrounded by a whole set of thingies on advertising, technical specification etc (must be

Europeanstandard) The framework so allows the commission,you must report your decision essentially,

the commission has powers to investigate and take infringement action. Most importantly, there's a

whole set of special remedies for a disappointed bidder. Can seek compensation for loss of a fair chance


11/15

etc. and also a special remedy, disappointed bidder can ask a court to void a contract that has been

made

So if you can't clearly justify how you went about make your decision, anyone disappointed in the

competition can take serious action against you as a body exercising a public function or a PA.

Evaluate the framework yourself. Othermainpoint; the thresholds on which the framework applies is

very low. Applies even to day to day procurement decisions by many PA's.

4. Contract compliance

This denotes the use of the great commercial power of government contracting to achieve political and

social objectives. This might include environmental requirements or anti-discrimination policies for

example. Note how the technique (which has a long and chequered history in this country) touches on

basic ideological questions: social engineering, however beneficial, versus a purist conception of VFM

and business autonomy.

We see the technique in play in the well-known case ofYL v Birmingham CC[2007] UKHL 27, which in

turn points up the challenges of legal accountability generated by the trend to contractualisation.

(Note the valedictory legislation - s. 145 of the Health and Social Care Act 2008:

A person (P) who provides accommodation, together with nursing or personal care, in a care

home for an individual under arrangements made with P under the relevant statutory provisions is

to be taken to be exercising a function of a public nature in doing so.

See further: London & Quadrant Housing Association v Weaver[2009] EWCA Civ 587)

Contract Compliance

Supposeyou are the pm and you think about the way in which you might like to deliver policy/ to change

behaviour. As lawyers, we legislate. We use the power of commandthrough law. Ifgovernment has all

this wealth, why not use that power of wealth when that wealth is being dispersed using contract to

impose Ts and Cs on contractors which serve wider policy aims.

Use your power of contract based on you are power of wealth based on you are power of tax to achieve

wider policy objectives. Standard technique but power increased if we go down the road of

contractualisation.

can say to firms if you don't do xyz we aren't going to contract with you.

or we can say if you want to contract with us, you do abc.

As such, it has quite a checkered history in this country. We could say we're only going to contract for

goods and services with firms who have some kind of environment friendly rating. So we use our power

of contracting to further our general interest as a government in increasing environmentally friendly

stuff. We use legislation (stick) but this is the bit of carrot as well.


12/15

We can do similar things in terms of fighting discrimination in employment practice (long been used as a

tool in n Ireland) saying we want to see an appropriate proportion in you are workforce of both

Catholics and protestants.

Again we could be saying to people in certain parts of the country, if you want to win the contract for

the motorway, you are employing a sig no of unemployed people from the locality.

More controversial again, we won't contract anybody who has business dealings in what was apartheid

south africa.

What we see immediately is that it raises some big ideological questions. about how we think

government contracting shld be a thingy of value for money based on price. biz autonomy. and on the

other hand arguments in favor of broader policy objectives ("social engineering")

Not surprisingl this is an era we see the pendulum swinging. C's under thatcher, very against this (NI

apart) central government being ordered not to go down this route and legal rules to stop left wing

labour council from gg down this route e.g. sa partied. Under NL government, you see something of aswing back. Quite a lot of work here around the area of the government.e.g. you have to be green

friendly and we specify it according to a particular code of practice.

intereting one is the use of CC to promote HR. if you want to be a service provider taking money from a

PA in providing ur services to an individual, you must make sure that ur services adhere to the standards

of human rights.

YL v Birmingham

case of old lady in a private home largely funded by PA. q waswhent he care home said you had to leave,

whether she cld stand on the HR act. would've been art 8 family l ife etc. concerns that movign her mightlead to a premature death. In a highly controversial decision (3-2) HL decided HR act didn't confer

protection cause the care home though it was in receipt of public funding to care for her was essentially

a private biz so for the majority it shldbelooked at thru those lenses in demarking the limits of public fn.

That case is now worth revisiting coz there was something else there which influenced at least 2 of the

majjudge.s There were 2 sets of contracts made bw local auto inc are home. and 2nd bw care home and

her. note that both of those contracts involved an obligation on the care home in the delivery of the

care to her to abide by hr standards. the significant one being the duty to avoid inhuman and grading

treatment (art 3)

so it was a sense of which route the hl would go down. would they apply the hra to spply by itself

meaning the hra would trump the contract. or would they say it doesn't apply which leaves ppl with

their contractual and other forms of regulatory protection. the majority chose the lathater (and notice 2

of htemaj factored in that she was given contractual port to justify the decision)

pros and cons of contractual


13/15

more limited form of port

moresomething as it requires ppl to think about what hr requirements mean in this context

also conveys a sense of ownership

5. PPP/PFI

A key component of the New Labour Governments strategy for the delivery of modern, high quality

public services, and for advancing national competitiveness, public private partnerships epitomise the

idea of contractual governance. While PPPs cover a broad range of business structures and partnership

arrangements, from outsourcing to joint ventures, and to the sale of equity shares in state-owned

business, the principal vehicle in the UK has been the Private Finance Initiative. As a way of delivering

major capital investment, PFI represents both an alternative to, and - since the public sector is not

generally the owner and operator of the assets - a transformation beyond, the traditional paradigm of

government contract. As the name suggests, it differs from other forms of PPP in that the private

contractor not only carries out the project but also arranges finance.

Rationale

The standard rationale is VFM; achieved through private sector innovation and management skills

delivering significant performance improvement and efficiency savings. To this end, the UK Treasury

Department has attempted to specify the appropriate conditions for PFI (as against a public sector

scheme or traditional procurement process):

y there is a major capital investment programme, requiring effective management of risksassociated with construction and delivery

y the private sector has the expertise to delivery the structure of the service is appropriate, allowing the public sector to define its needs as

service outputs that can be adequately contracted for in a way that ensures effective, equitable

and accountable delivery of public services in the long term, and where risk allocation between

public and private sectors can be clearly made and enforced

y the nature of the assets and services identified as part of the PFI scheme are capable of beingcosted on a whole-life, long-term basis

y the value of the project is sufficiently large to ensure that procurement costs are notdisproportionate

y the technology and other aspects of the sector are stable, and not susceptible to fast-pacedchange

y planning horizons are long-term, with assets intended to be used over long periods into thefuture


14/15

y robust incentives on the private sector to perform can be set up [2]

Apportionment of risk

According to the Treasury:

The benefits of PFI flow from ensuring that the many different types of risks inherent in a major

investment programme are borne by the party best placed to manage those risks The

Government does not seek to transfer risks to the private sector in a PFI project as an end in

itself. Where risks are transferred, it is to create the correct disciplines and incentives on the

private sector, which then drive value for money through more effective risk management. In

general, the Government underwrites the continuity of public services, and the availability ofthe assets essential to their delivery, but the private sector contractor is responsible for its

ability to meet the service requirements it has signed up to. Where it proves unable to do so,

there are a number of safeguards in place for the public sector to ensure the smooth delivery of

public services, but the contractor is at risk to the full value of the debt and equity in the project.

The full value of that debt incurred by the project, and the equity provided by contractors and

third parties, is the cap on the risk assumed by the private sector.[3]

Concerns

y Government becomes overly vulnerable to the vagaries of the market; some PFI contractsproduce mega-profits at the taxpayers expense

y Many PFI contracts fail to provide real risk transfer from the public to the private sectors;whatever the contract may say, with essential services the public sector remains the

guarantor of last resort

y Limited pool of willing and able PFI contractors undermines competitive discipliney Elongated, multi-faceted, and large-scale, PFI arrangements are peculiarly susceptible to

contractor failure, a source both of service disruption and further public expense

y Increasingly huge revenue commitments limit the spending options of futureadministrations

y Lack of transparency; blurred lines of accountability

2 HM Treasury,PFI:Strengthening Long-term Partnerships (2006), 32.

3Ibid, 38.


15/15

Third Aspect (PPPs and PFI)

byppps we mean a whole kind of set of arrangements from outsourcing to joint ventures bw pub bodies

and priv sector, inside that a very imp development under NL is the idea of PFI

PFI takes things one step further. with the PFI you (PA) make an arrangement with thte private

enterprise essentially do do some infrastructure. Make a project and usually (might be just to develop

the infra or maybe to develop then operate the project)

might for eg cover the ldn tube, might cover the building of a new hospital adn the funning of it. blunt of

a new sch academy and the running on it. whatyou need ti see is the further step. pt of PFI is that the

private enterprise funds the project. Funds the infrastructure.private enterprise makes the money like

this;

might for eg build the seven bridge and pay for the ... then has the entitlement to charge tolls on it for a

period of yeasr.

or it might modernize the tube over 3- yrs. pay all the costs then have an entitlement to a percentage of

the ticket prices to get its money back. Or again the NHS trust might say we need a new hospital, youbuild and run it, we'll pay you say 20 mil a year to run it once use built it. Think of it in terms of a

mortgage. It's a particular form of contractual arrangement.

What you need to see ist t this became v popular under nlgovernment being really pushed by gordon.

from the pov of the government at the time it had great advantages cause it meant youcld do major

new infrastructure projects and you didn't have to pay the money up front. youcld hope to pay it over a

period of time. but of course its not a freebie and a result of this large scale development is that many

local autos and governmentetc are now tied in to a very sig no of contractual arrangements that go

many years into the future. so if you like taxpayer was saving money earlier but now has to ay more

recompense for taking of risk by priv enterprise etc...

need to factor in what's happened in terms of recession and crash and deficit see this is a controversial

bit of the nl legacy.

Documents

4 - Contractual Governance (Mostly Raw)