ITEM 4 TREASURY OVERVIEW COMMITTEE 26 NOVEMBER …

T ITEM 4 26 NOVEMBER 2003 PAGE 1

REPORT ORIGINALLY CONSIDERED AT CABINET 4 NOVEMBER 2003

Key Decision Yes/No

Listed on Forward Plan Yes/No

Within Policy Yes/No

Policy Document ……………………………………………………….

Overview Committee ……………………………………………………….

PUBLIC PRIVATE PARTNERSHIP (PPP)

Report Index Page Number

1. Purpose 3

2. Recommendations 3

3. Issues and Choices 3

Background 3

Scope 4

Summary of Offer 5

In-House Comparator 5

Affordability 7

Value for Money 8

Procurement 8

Pensions and Performance Bonds 9

Pensions ABS 9

SLAs/KPIs/PPM/Deduction Caps 10

Governance 12

Contract Management Arrangements 13

Financial Standing 13

Office Accommodation 14

ITEM 4 TREASURY OVERVIEW COMMITTEE

26 NOVEMBER 2003


Risk Allocation Matrix 14

Exit Strategy and Arrangements 15

Commentary on Contract from Eversheds 15

Contract Length/Early Payments 16

4. Implications 16

Policy 16

Resources 16

Legal 17

5. Appendices

1. Scope of Partnership 18

2. Balance Sheet Comparing the HBS and In House Proposals 19

3. Summary of HBS Offer 22

4. Risk Allocation Matrix 29

5. Draft Governance Proposals 32

6. Pensions and Performance Bonds 36

7. Overview of PPP Agreement 40

Accountable Cabinet Member: Isobel Wilson

Contact Officers: Mike Hood, Assistant Treasurer (A&CS), 254612

Steve Readyhough, Business Support Manager, 254614

Hilary Parker, Partnership Delivery Manager, 254614


1. Purpose

1.1 To consider approving the final PPP contract, subject to the remaining elements of the contract negotiations being satisfactorily concluded.

2. Recommendations

2.1 That the Cabinet be requested to consider this report and the attached appendices, and other information to be available at the meeting, and decide whether or not to proceed to complete a Public Private Partnership with HBS Business Services Group Limited, on this basis.

2.2 That the Council be invited to endorse the Cabinet’s decisions at its meeting on 11 November 2003.

3. Issues and Choices

Background

3.1 On 30 October 2000, the Council’s Policy and Resources Committee expressed its concern about the quality of the support that was available to the Council’s front-line services and instructed officers to explore the potential of a partnership with a commercial company – a Public Private Partnership.

3.2 Initial enquiries suggested that such a partnership could offer significant benefits. The key reasons that drove the decision to undertake this exploration were to establish whether there were:- financial benefits, investment potential, improvement in services and service delivery leading to culture change at all levels of the organisation

3.3 In March 2001, the Committee decided to continue with this exploration in collaboration with Northamptonshire County Council in order to pool expertise and capacity, reduce the costs of the procurement process and seek a better outcome through a joint partnership deal.

3.4 An OJEC notice was published in mid-June 2001 seeking expressions of interest from companies which wanted to work in partnership with Milton Keynes Council (MKC) and Northamptonshire County Council (NCC).

3.5 On 9 and 11 October 2001 respectively, MKC and NCC decided to proceed in collaboration to the next stage of the procurement process for a public private partnership (PPP) and approved the proposed shortlist of four companies to be invited to submit proposals.

3.6 On 17 July 2002, the Council considered both the Bids received from Amey and HBS and the in-house Comparator. The Council agreed to proceed to a Best and Final Offer stage with the two Bidders (Amey and HBS).


3.7 On 10 December 2002, HBS was appointed Preferred Bidder and the final negotiations have proceeded during 2003.

3.8 The Council’s Project Team has been supported by external professional advice throughout the procurement process. Legal and Commercial advice has been provided by Eversheds. ICT advice has been provided by the NCC Group. Financial advice has been provided by both PKF and Deloitte and Touche (D&T).

The Council has recently become aware of a potential conflict of interest with D&T because, since the demise of Arthur Andersens (August 2002), they inherited the audit of Terra Firma, HBS’s ultimate owner. Whilst it is likely that the consultancy arm of D&T were unaware of the conflict with their auditing arm, the Council sought advice from both the District Auditor (DA) and the Institute of Chartered Accountants for England and Wales (ICAEW). The DA advised that “The Council will need to satisfy itself that the advice it has received from its financial advisers is robust and compliant with professional standards, and that the adviser’s professional conduct is not compromised.” The ICAEW, through their president has been asked to advise on this matter and he has referred this to their Ethics Committee for consideration. (A view from the Ethics Committee is expected this week and an update will be provided to the Cabinet.) Whilst contract negotiations are not quite complete with all major areas agreed, it is anticipated the Council will be in a position to decide whether the deal represents value for money and achieves objectives, subject to satisfactory conclusion of final minor details, by the evening of the meeting

Scope

3.9 The scope of the Partnership was finalised following the Cabinet meeting on 15 July 2003. The various services that form part of the scope have been listed below:

ICT & e-government Revenues and benefits Finance Facilities management Property (estate management) Administrative support Human Resources Debt recovery Public access to services Fleet management & maintenance Procurement Highways maintenance

3.10 Tabled below is a summary of the posts in scope and posts retained shown by directorate (excluding schools). A more detailed analysis is shown in Appendix 1.

3.11 Table Showing Scope by Directorate (posts):

Directorate In Scope Retained Total Resources/Chief Executives 323 142 465 Environment 212 564 776 Learning and Development 119 771 890 Neighbourhood Services 107 804 911 Total 758 2284 3042


Summary of Offer

3.12 This section of the report and the section below (In House Comparator) looks at what is on offer from HBS and compares this to what the Council could do if there were no PPP. A summary “Balance Sheet” of the two proposals is provided at Appendix 2.

3.13 The offer from HBS includes a number of benefits to the Council that are described in detail in Appendix 3. The key elements of the Partnership proposal are:

(a) the provision of a modern Public Access service through a 40 seat contact centre, supported by a SAP Customer Relationship Manager system

(b) upgrading of the current financial management system through the introduction of the SAP Enterprise Resource Management system

(c) guaranteed delivery of the Council’s e-govt obligations

(d) guaranteed standards of service delivery based upon Service Level Agreements and Key Performance Indicators

(e) £2.1m financial savings should the Council decide on a 12 year contract. The Net Present Value (NPV) of this is £1.4m

(f) £21m investment in technology, systems and processes. This includes the cost of implementing the major ICT systems

(g) guaranteed royalty payments

(h) an approach to procurement that could lead to significant further savings to the Council

(i) a proposal to solve any office accommodation problem which may arise when the leases expire in Saxon and Lloyds Courts. The Council has confirmation that from April 2004 there are no legal or financial barriers to staying in Saxon Court or Lloyds Court.

In-House Comparator

3.14 A number of specific Best Value reviews of support services had been undertaken and these were presented to the Treasury Overview Committee on 30 May 2002 for Member consideration. These reviews sought to assess the effectiveness, efficiency and economy of the current support services and to identify ways in which they might be improved.

3.15 These reviews were extended, to provide a “comparator” to the PPP offer. £30,000 was made available (from Government funding of the Local Public Service Agreement) to enable officers to have access to external advice and


support in formulating their proposals. The results showed net savings of £2.3m over a ten year period. Further details are set out below.

3.16 The purpose of this complementary approach was, first, to provide a basis to compare the best the Council could achieve with the proposals of the bidders and, secondly, to identify a way forward should the Council decide not to proceed with a PPP. By this means, the Council would be able to satisfy itself that Best Value has been achieved, whichever option it chose to pursue.

3.17 A number of services which fell within the scope of a PPP have not been the subject of a Best Value review. For most of these services, a less formal assessment has been made of the current state of the service and, where possible, what would be required to achieve significant improvement.

3.18 Inevitably, officers were not able to devote to this task resources of a scale comparable to those of the PPP bidders. This work was undertaken in addition to their normal duties. Nevertheless, generally, work of a high quality was achieved.

3.19 The in-house comparator proposed:

(a) an information technology system, providing fully integrated business and customer processes and systems for the Council as a whole; this would lead to improvements in support services to schools;

(b) further development to enable integrated business and customer processes and systems between the Council and other public service providers in Milton Keynes (subject to their agreement to participate);

(c) a comprehensive customer relationship management system, providing for face-to-face, telephone and electronic contact with the public, linked to all the Council’s information systems;

(d) further development to enable integrated public access to Council and other public services in Milton Keynes (subject to their agreement to participate);

(e) development of e-government applications;

(f) investment of £2.5m in new systems over the coming 10 years, to be funded from the Council’s capital programme;

(g) first steps towards the rationalisation of the Council’s property portfolio and reactivation of previous work to identify proposals which would meet the Council’s future office accommodation needs;

(h) improvements to the Council’s procurement arrangements;


(i) a plan for continuous review and improvement of all the Council’s business processes and systems, to be provided by an external consultancy;

(j) significant improvements to a number of the ‘secondary’ services, including an Integrated Environment approach;

(k) revenue expenditure of £3.198m to achieve these improvements, with the possibility of net savings of £7.93m over a ten year period. However, savings of £5.6m have already been implemented and factored into the Council’s budgets over the next 10 years.

3.20 The in-house proposals would lead to some further outsourcing, however, which might raise some issues of continuity of employment and terms and conditions for staff.

3.21 It was clear that a great deal of quality and very considerable effort had gone into producing the comparators. At the time there was a concern that the level of investment proposed to implement the major ICT systems would be inadequate. The difference, in part, may be down to the scale of the implementation envisaged, or the choice of software. What could not have been foreseen at that time was the introduction of new freedoms to Councils in the form of the Prudential Code for Capital Finance. This gives greater flexibility to the Council in its ability to incur and finance capital expenditure and enables it to consider alternative solutions to, for example, its office accommodation needs. There was further concern that a joined up solution for the corporate services could be impaired by the use of a number of different suppliers to deliver the ICT services. Finally there was an overall question of the availability of management capacity to deliver change on this scale. The comparator proposals put forward by the Environment Directorate did not represent a significant risk, apart from the uncertainty around predicted savings in the future. These proposals were considered to be deliverable.

Affordability

3.22 The Council has been considering both a 10 year and a 12 year contract. Whilst a 10 year contract would not deliver financial savings, a 12 year contract is estimated to save the Council £2.1m (£1.4m NPV) - an annual average of £177k, an equivalent saving of a ¼ penny on Council Tax. However, the spread of this is uneven and still subject to negotiation; the final position will be tabled at the Cabinet meeting. The District Auditor has been consulted on the structure and presentation of the Financial Model. The affordability for individual services, such as the Housing Revenue Account, will be assessed when further information is received from HBS

3.23 When looking at the affordability of HBS’s proposal a prudent approach has been taken in making the assessment. It represents the best estimate of what is certain while making some provision for that which is uncertain. For example, the procurement savings that could materialise may well be in excess of the sum assumed in the assessment but if they are not guaranteed they have not been included. Similarly, contingencies of £1.5m have been


built in to provide for unknown costs. Although this approach could be described as cautious it cannot claim to give the Council complete protection against the risks inherent with a contract of this size and value. These risks are different to those associated with in-house provision. Please refer to Appendix 4, Risk Allocation Matrix.

3.24 An assessment of the affordability of the proposal will be tabled at the Cabinet meeting.

Value for Money

3.25 The Council needs to be satisfied that the HBS proposal represents value for money. There were a number of reasons why the Council sought to enter into a partnering arrangement – the injection of fresh investment in services, improvements in service quality, opportunities for cultural change, management diversity, creativity and financial savings.

3.26 HBS will invest £23m in Council services, subject to the Council committing £1.4m of capital funds set aside for the implementation of e-Government initiatives. HBS’s headline figure is represented by £2.5m of new IT equipment (hardware and software), and £20.9m of implementation/transition/IT operating costs. This compares with £1.6m proposed by the in-house comparator, which proposes a less expansive solution.

3.27 HBS will achieve improvements in service quality which are linked to agreed Service Levels and Key Performance Indicators, and to its investment in public access strategies and meeting e-Government targets. The approach proposed by the in-house comparator offers fully integrated business and customer processes and systems for the Council as a whole and between the Council and other public service providers.

3.28 Cultural change is expected to arise through different strands within the organisation. At a corporate governance level the proposals for joint working are outlined in Appendix 5. In the context of staff HBS will provide shared development opportunities for the wider Manager’s Assembly group of managers.

3.29 Subject to the comments made in the section on affordability above, the HBS proposal will deliver savings of around £2.1m over the life of the contract if a 12 year term is accepted. The in-house comparator offers the possibility of net savings of approximately £2.8m over 12 years. Although these in-house savings are considered to be deliverable, as stated above, they must nevertheless be seen in the context of the available management capacity to deliver the change management required and that they are not guaranteed in the same way as the HBS offer.

Procurement

3.30 An integral part of the contractual arrangement with HBS will be an arrangement designed to deliver significant procurement savings to the Council. The arrangement has been designed to incentivise HBS through a savings share process that increases the reward to HBS as they increase the


level of savings delivered to the Council. The main elements of the agreement are as follows:

(a) HBS will guarantee total procurement savings of £2.8 million over the ten years of the contract (or £3.7m over 12 years). This represents 0.35% saving based on an addressable spend of £80m per annum.

(b) The only dependency linked to this guarantee is that MKC will make ‘reasonable endeavours’ to ensure that all retained staff use contracts and follow recommended policies and procedures.

(c) An average annual fee of some £400k will be paid by MKC to HBS for provision of the procurement service. If savings achieved are over and above the Unitary Charge in any year, HBS will repay MKC the shortfall between the actual savings achieved and the fee paid.

(d) In addition to the basic fee, there are two ‘bonus’ levels which, if achieved, will provide HBS with a proportion of the savings achieved of either 20% or 30% depending on the level of savings. To earn the bonus fees HBS are required to deliver a high level of savings to the Council.

(e) Procurement will be approached on a project-by-project basis. This will eliminate the need to baseline all prices at the outset thus reducing the time and costs incurred before savings can be made.

(f) CBC contracts will be ‘ring-fenced’ to ensure MKC are able to retain membership of CBC.

(g) There is provision for termination by either party to the contract after an initial three-month period or on subsequent anniversaries of the commencement date of the contract. There would however be termination fees payable to HBS should this occur.

Pensions and Performance Bonds

3.31 The Council requires two bonds, one to meet any shortfalls in contributions to the Admitted Body Status (ABS) pensions scheme (pensions bond – see discussion below) and a second (performance bond) to meet the procurement and interim management costs the Council will face should the contract with HBS terminate early. These are discussed in detail in Appendix 6. Subject to HBS agreeing the position set out in 3.33, the levels of the bonds on offer from HBS are sufficient to meet our needs.

Pensions/ABS

3.32 The application for Admitted Body Status (ABS) has been submitted to the Buckinghamshire County Council Local Government Pension Scheme and confirmation of the bond level is awaited. A meeting with the Actuary was scheduled for Friday 24 October to finalise the bond requirement which should


complete the final hurdle towards obtaining ABS agreement. The Council has previously stated that this will be an important consideration when awarding a contract.

3.33 The Council is seeking to negotiate the following position regarding risk transfer for pensions. It is anticipated that this position will be agreed by the date of the Cabinet meeting.

(a) HBS to meet the full cost, in respect of all service, arising from redundancy early retirements and other discretions within its control, the cost in a year to be met by a lump sum payment. Similarly, in accordance with existing procedures, HBS are to meet the cost of ill-health retirements.

(b) The Council to retain the risks associated with the liabilities in respect of investment performance

SLAs/KPIs/ Price Performance Mechanism/ Deduction Caps

3.34 A Partnership contract is designed to be less adversarial than a traditional contract. A traditional contract is agreed on the basis of a clear and often very detailed specification of the goods, works or services to be provided. Thus the client states clearly the exact standard to a fine level of detail of what is required. Failure to deliver to that specification produces dispute through the contract clauses that are only resolved through an adversarial series of exchanges where the contractor argues the goods, works or services are of specified standard and the client argues it is not. On a day to day basis the client often holds sway and the contractor is motivated by the imposition of penalties by the client or withholding payment.

3.35 A partnership contract may have detailed provision for the services to be provided but instead of the adversarial motivation techniques the contract is structured to encourage the contractor through shared and common objectives to be rewarded for achieving the desired standards. Put simply instead of penalising the contractor for failures, the contractor is financially rewarded for achieving the objectives through ensuring the contract structure links the payments to the achievements. Disputes can still arise but are less likely if the objectives are agreed and (in management speak) goal congruence is achieved through the contract terms. The contract with HBS is designed to encourage both sides to develop initiatives (Projects) to deliver service efficiencies across all Council services.

3.36 The contract is underpinned by a series of 19 service level agreements (SLAs) covering all service streams within the scope of the Partnership; of these, 6 have been signed off and the remainder are due to be signed off by 31st October 2003. These set out:

(a) Service description – scope and objectives, exclusions

(b) Service requirements – inputs, outputs, performance standards.


3.37 SLAs have been developed by the relevant Heads of Service and their managers and overseen by nominated accountable officers. The brief to authors was to retain a ‘forward-looking’ approach as far as possible, focussing more on what we will need in future rather than mapping the current position, on what needs to be delivered rather than how it will be done. They provide a comprehensive statement of the Council’s requirements for the in-scope services. Many have been developed with the benefit of advice from consultants. Widespread consultation has taken place with a number of interested groups, including service users, staff responsible for delivery of the service and trade unions. SLAs have been subjected to a variety of internal reviews and the Council’s legal advisers, Eversheds, have also been consulted. Revisions have been made to the documents to reflect the comments and advice received. They have also been considered by the four Overview Committees – their recommendations were reported to the Cabinet meeting on 2 September 2003 - and the Contract Management Review Group.

3.38 The anticipated growth in Milton Keynes in the next few years will lead to increased demand for the services provided within the contract. The Council is currently completing negotiations with HBS on appropriate triggers that increase the Unitary Charge in line with real increases in costs. It is recognised within the negotiations that increase in usage of a service do not always lead to an increase in the cost of delivering that service

3.39 The performance standards are defined in a set of performance indicators (PIs) for each service. All PIs are considered to have significance in driving the Council’s stated priority of achieving continuous improvement as well as helping the Council and HBS to understand the level of performance being achieved at any given time. However, a number of them are of such significance to the success of the Partnership that they have been classified as key performance indicators (KPIs). There are 138 KPIs and approximately 500 PIs in total. These have the distinction of providing a disincentive to HBS to perform at anything less than the agreed performance level by linking the KPIs to a price performance mechanism (PPM). In addition, if the performance of HBS, across a range of PIs is below the necessary standard, then a further deduction from the unitary charge will be made.

3.40 The PPM will enable the Council to apply a financial penalty by way of a deduction from the monthly payment it will make to HBS where any KPI fails to achieve the agreed performance level. The PPM uses a scorecard system, with the targets being based on the KPIs. Scorecards contain 8 bandings, where band 1 represents performance to target or above, resulting in no deductions and band 8 represents performance so poor as to represent no service, resulting in 100% deduction. The total amount at stake for each target will depend on the amount of Unitary Charge payable to HBS that year, the relative weighting of the Service Group in which the target sits (compared to other service groups) and the relative weighting of the target within the service group.

3.41 The Council and HBS are clear on the principle that no service must equal no fee – though the amount due under the receivables financing agreement may


be considered separately to this. Therefore, should HBS perform so poorly that they can only achieve band 8 performance against every target, then the deduction would equal the amount of the unitary charge, less monies due under the receivables financing agreement. The Council recognises that if HBS are providing some level of service (i.e. performance is in bands 2 to 7) then total potential deductions should be limited to 30% of the Unitary Charge - this is still subject to final negotiation. Where performance against any target has been less than band 1 in any period, it is the Council’s intention that this situation be rectified in subsequent periods rather than tolerate persistent poor performance. Therefore, where performance against target for any period is less than band 1 performance, and performance in the previous period was also less than band 1 performance, then a repeat deduction factor will be applied. Notwithstanding the above, excessively poor performance will lead to termination triggers.

While the PPM will compensate the Council for poor performance it is not considered to be adequate as a sole remedy. Others include Step In rights and contract termination. The Council has also negotiated the following position regarding remedies to give it relief and/or compensation in the event of non-performance etc. The remedy is designed to appropriately incentivise HBS to ensure that the Council does not incur losses through the actions or inactions of HBS (eg housing benefits subsidy loss). Where such losses are incurred then HBS will compensate the Council on a sliding scale. This needs to be seen in the context of the current position where the Council causes such losses then the Council bears the entire loss.

Governance

The Council needs to set out the principles and structures for how the Partnership will work and how the interactions between the Council and the Partner shall be governed. The framework proposed has yet to be finalised and shall be subject to periodic review to ensure that the terminology and guiding principles align with the organisation and objectives of the Partnership. A summary table of the governance structures is found at Appendix 5 entitled Managing Partnership Operations. The proposed table includes details of how the Council could be involved in both national and regional forums to exchange ideas and learn from best practice elsewhere.

3.42 The governance structures will work at a number of levels and include the following:

(a) Partnership Strategy Group; this will set out the vision, objectives and priorities of the Partnership and ensure overall compliance with business goals.

(b) Partnership Executive Review Board; this will provide executive management to all aspects of the Partnership and review the Partnership performance;


(c) Business Improvement Project Board; this will be a sub set of the partnership executive review board. It will commission and review projects including overseeing their delivery.

(d) Contract Review Sub Group; this group will evaluate performance against Partnership goals and oversee the delivery of transition projects.

In addition to the above there will need to be regular reports both to the Cabinet and to Overview and Scrutiny.

Contract Management Arrangements

3.43 The HBS contract will be managed by a small team of Council officers. The role of the team will be to:

(a) Act as the client point of contact for HBS

(b) Monitor the performance of HBS on a regular, sustained basis and provide reports to the retained structure and the Partnership Executive Review Board

(c) Enforce the provisions of the contract in the appropriate circumstances

(d) Liaise with the Directorates to collate information on HBS performance

(e) Verify and agree payments/deductions to HBS

(f) Assessment of new projects/changes with HBS whilst ensuring that value for money continues to be maintained and that the risk profile of the deal does not materially alter to the Council’s disadvantage

(g) Provide advice and assistance to Directorates on escalated issues

(h) Provide advice and assistance to the Directorates on contracting and procurement issues in general

3.44 In addition, the Council will retain a number of senior officers in several of the services transferring e.g. within finance, ICT and HR

Financial Standing

3.45 During 2002 the Council appointed PKF, a firm of Accountants and Business Advisors, to report on the financial standing of HBS as part of the BAFO evaluation. As HBS’ financial standing could have changed in the intervening period, PKF were instructed to update that work.

3.46 A key issue, in considering HBS’s financial standing, is the strength of its financial base and its ability to meet its future financial liabilities in order to remain solvent and becoming profitable. HBS have estimated that, should the MKC and Northamptonshire contracts go ahead, they will require £59m of


capital before they reach a point of profitability. Terra Firma has agreed to fund this capital requirement and have injected £49m into the HBS and have stated that they will provide the balancing £10m when the Councils sign their contracts.

3.47 Terra Firma Capital Partners Holdings Limited is regarded as the ultimate parent undertaking of HBS. Terra Firma will not provide indemnification to the Council in respect of HBS if HBS fails to perform as expected. Terra Firma considers that there are provisions in the contract to protect the Council (including bond facilities) and rights of redress.

3.48 Nevertheless, PKF’s work has established that HBS’ underlying financial planning remains the same as when they reported in November 2002, albeit that the source of some of the funding has changed. HBS has been undergoing a refinancing process through an injection of capital from Terra Firma, on completion of which HBS will be entirely equity funded and the directors consider in a much better position financially.

3.49 PKF have confirmed that they uncovered no material reason why the Council should not do business with HBS.

Office Accommodation

3.50 One of the objectives the Council set out for its potential Partners within the Invitation to Negotiate, was to provide an office accommodation solution in the light of the leases at Saxon Court and Lloyds Court coming to an end in 2007 and 2008 respectively. HBS have put forward a proposal to procure office accommodation in Bletchley to meet the Council’s needs. The cost to the Council, excluding lease costs, would be £5.6m.

3.51 Whilst the solution proposed by HBS does meet the Council’s needs, a small team of officers has been looking at whether an alternative solution, provided by the Council, would offer better value for money. Proposed changes to the restrictions placed upon local authority capital borrowing (the Prudential Code) are due to come into being in April 2004. These changes would offer the Council the opportunity to take out a loan, provided an affordability test was passed, to build its own accommodation to replace Saxon and Lloyds Court. Other options open to the Council include leasing alternative office accommodation itself.

3.52 The decision on which accommodation route the Council takes is a freestanding one and not part of the wider PPP decision. The Council has agreed to confirm with HBS, by 31 December 2003, which accommodation route it will take.

Risk Allocation Matrix

3.53 The Project Team has prepared a detailed risk management log which set out to identify the significant risks, problems or issues in respect of PPP. Each risk was assessed in terms of the impact it would make if it occur red and the probability of it occurring. Against each risk, a set of management tools was identified to manage the risk together with a commentary on the current status or management action. As the project negotiations have progressed, some of


these risks are no longer relevant or have been managed and mitigated. Appendix 4 is a high level summary of the “top eleven” risks following analysis of the remaining items. It is important to note that the objective of the PPP is to achieve a significant risk trans fer to the Partner, but that 100% risk transfer to the Partner is neither realistic nor achievable given the partnership nature of the arrangement and the necessary interfaces between the Partners. Hence the risk allocation matrix at Appendix 4 must be viewed in this context.

Exit Strategy and Arrangements

3.54 The Council’s exit strategy has always been to ensure that in the event of termination, the Council would be in a position to effect a smooth transition and maintain business continuity by securing both staff and assets. This strategy has been implemented via the terms of the Contract (please refer to paragraphs 13.7 and 13.8 of Appendix 7 for further details). However, it is important to note that the costs of securing the staff and assets vary depending upon the type of termination and the point at which it occurs during the term of the contract. These costs, known as termination costs, will also include additional elements for contract breakage and loss of profit, again determined by the type and time of termination. The table below sets out the costs payable by the Council in each case. Please also note that these costs are being analysed by the Council’s financial advisors and the Council expect these costs to reduce.

Termination Costs Termination at Will

£m

Termination for Breach of Contract £m (these can be

spread over 5 yrs)

Year 1 17.6 3.5

2 21.0 3.9

3 21.1 3.4

4 22.4 3.8

5 20.6 2.8

6 19.0 2.0

7 16.6 1.0

8 13.8 0.7

9 10.5 0.4

10 6.8 0.1

11 3.7 0.0

12 0.0 0.0

Commentary on Contract from Eversheds and Contract Negotiations

3.55 The Council has been negotiating the Partnership contract with HBS for several months. The contract contains 82 clauses and 29 schedules. All of the key (or difficult) clauses are close to being agreed, although there remains some negotiation to be concluded in respect of a number of the clauses. It is anticipated that these outstanding clauses will be finalised over the next month.


3.56 The contract drawn up by Eversheds is designed to provide the Council both the flexibility and protection it requires within a Partnership framework. The draft Contract has been used and developed over the past three years on a number of strategic partnering arrangements and has been tailored to meet the needs of the Council. Therefore Eversheds state, with confidence, that the mechanisms within the Contract have been tried and tested elsewhere. The detailed commentary on the contract is contained within Appendix 7 of this report.

Contract Length/Early Payments

3.57 HBS has offered to improve the financial package on offer to the Council with two optional variations to the original proposal. These are in respect of the length of the contract and payment in advance.

3.58 The Council could agree to enter into a 12 year contract rather than one of 10 years (in which case the option to extend would be for up to 3 years rather than up to 5 years, i.e. a maximum of 15 years). Compared to a 10-year contract, one of 12 years gives the Council an additional financial benefit of £2.1m.

3.59 The payment arrangements proposed in the BAFO are HBS propose two invoices to the Councils each month - one standard invoice payable on the 15th day of each month for an amount equal to the total months charge for services delivered with a second invoice at the end of each month to cover additional charges/deductions. By agreeing to make the standard monthly payments in advance (on the last working day of the preceding month) HBS has offered an additional financial benefit linked to a capital payment of £1.4m by the Council to HBS for the provision of E-Gov improvements. The revenue advantage of this combined option is just under £2.7m.

4. Implications

4.1 Policy

The intention to deliver a wide range of services through a PPP arrangement is consistent with the Council’s strategic objectives.

4.2 Resources

One key financial consideration is the impact on the council tax payer of the proposals. The overall savings are small, and can be expressed in two ways, either un-inflated or taking account of inflation. This latter approach - sometimes called Net Present Value - considers the phasing of the savings, for a saving now, is worth more to a person than a saving in many years time. The following table sets out the position for a contract over 10 years and for one over 12 years:


Table: saving over the life of the contract

Net Present Value Un-inflated

• 10 years £307k cost £15k saving

• 12 years £1,377k saving £2,113k saving The incidence of savings or costs over each year of the contract is subject to final negotiation and the outcome of this will be tabled at the Cabinet meeting. Overall, the Council has only to trim costs by £176k a year to realise the un-inflated lifetime savings that are proposed. The Council should therefore look to other advantages arising from the contract to support a decision to proceed.

These lie in the following areas. Firstly, improving the quality of services, at a rate that is quicker than that which can achieved by the Council, or to a higher level. The advantage of the contract is that the promise of quality is backed by a financial commitment, the Price Performance Mechanism [PPM]. As long as the PPM has sufficient bite, the promise of quality is very real. A PPM that can run to 30% of the contract value, does have sufficient bite.

Secondly, changing the culture, although in the end, this should find its outcome expressed in the form of a lower cost or improved services. Thirdly, the ability of the Council to focus its energies on the development of the city.

At the time of writing the report, there were several issues that had not been completed. These will be reported, on paper, to the Cabinet, when it will be made clear what weighting should be attached to each item. Given the nature of the process, there will need to be delegated arrangements to sign off any outstanding matters, before the go-live date.

The Council’s financial advisors have given a preliminary indication that the PPP proposals satisfy the Council’s FRS5 obligations (i.e. the assets procured by HBS will not sit on the Council’s balance sheet). Their formal opinion is expected within the next week.

4.3 Legal

External legal advisers have been employed from the beginning of this procurement process to ensure that the contractual arrangements are appropriate to enable the Council and its partner to meet all the legal duties imposed by law on a unitary council.

Background Papers: Cabinet Reports on the Public Private Partnership dated:

3 December 2002, 4 March 2003 and 15 July 2003.


Appendix 1PPP - Summary of post transfer and balance totals by Directorate

Transfer (TUPE

list)

PPP Retained

Core

MKC Service Core

Adjusted Transfer

VacantIn-Scope

Out of Scope

ResourcesHuman Resources 49 4 45 12 0Information and Communication Technology 86 3 83 4 0Finance 36 9 27 10 39Taxation and Benefits 92 3 89 24 0Legal Services 0 0 0 0 32Property Services 7 3 5 8 0Procurement and Contracts 3 0 4 1 0Resources Admin (Legal Services) 7 0 7 3 0Resources Total 280 22 0 260 62 71

EnvironmentStrategic Director + PA 0 0 0 0 2Business Support 15 0 15 1 1Development and Design 11 0 11 0 83Environmental Services 26 0 26 8 130Planning and Transport 46 11 35 6 106Technical Services 82 0 82 28 231Environment Total 180 11 0 169 43 553

Learning and DevelopmentStrategic Director + PA 0 0 0 0 2Childrens' Services 15 0 15 3 262Community and Economic Development 21 0 21 4 278Education 30 0 30 8 213Finance and Performance (L&D) 34 0 34 4 14Parish Council support 0 0 0 0 2Learning and Development Total 100 0 0 100 19 771

Neighbourhood ServicesStrategic Director + PA + secretarial 5 0 3 2 0 6Commissioning and Customer Care 2 0 2 0 21Adult Social Care 8 0 8 0 643Housing Strategy and Needs 10 0 10 0 25Landlord Services 54 0 54 10 103Finance and Business (NS) 22 2 20 1 1Neighbourhood Services Total 101 2 3 96 11 799

Chief ExecutiveCEO + PA 0 0 0 0 2Policy and Communications 0 0 2 0 0 23Democratic Services 1 0 1 0 22Chief Executive Total 1 0 2 1 0 47

Total Transfer and balance 662 35 5 626 135 2241

Total Partnership Transfer with Vacants (col. 1 + col. 5) 797

Total Adjusted Partnership Transfer with Vacants (col. 4 + col. 5) 761

NotesThe Adjusted Transfer figures do not account for core posts which may be vacant-in-scopeAdmin staff are counted with their substantive service, not as a separate streamThese numbers will be adjusted by the secondments/fast-tracks/agency staff list held by HR


Appendix 2

Balance Sheet Comparing the HBS and the In House Proposal

SUMMARY COMPARISON OF BENEFITS BETWEEN PARTNERSHIP AND IN HOUSE APPROACH

HBS IN HOUSE

BENEFITS BENEFITS

Modern Enterprise Resource Planning System Modern Enterprise Resource Planning System

40 Seat Public Access Centre Supported by SAP CRM Introduction of Technology to Support Improved Public Access

Investment Value at £21m (see table 1 below) Investment of £2.5m (see table 1 below)

Guaranteed Delivery of E-Govt targets Delivery of E-Govt

Stimulation of Culture Change within the Council Culture change arising from use of SLAs

Potential for Significant Procurement Savings Improved Procurement Arrangements

Financial Savings of £2.1m (12 year contract) Financial Savings of £2.3 million

Improved Service Delivery backed by SLAs and Penalties

Use SLAs to Improve Service Delivery


HBS IN HOUSE

Upper Quartile Performance for Recognised performance Indicators eg Revenues and Benefits

SLAs to meet upper quartile but no penalty mechanism

Further Development of Services and Savings through a Projects Approach

Provision of an Office Accommodation Solution With introduction of new Prudential Code the Council has greater scope to develop an in-house solution

Requirement to Meet Targets

Easier to trade level of performance fo r savings

DISBENEFITS DISBENEFITS

Partner Could go into Liquidation Concern over Management Capacity to Deliver Outcomes

Management of Services is Indirect Potential loss of focus

Less Flexibility to Reduce Future Costs


Table 1 - In-house comparator/HBS proposal - investment analysisMKC HBS £,000 Notes £,000 Notes

Planned Capital Expenditure 2,452 From existing capital programme 2,078

Includes £1.4m contribution from the Council

Staff Implementation Costs

Will generally utilise existing MKC staff, therefore budgeted for within the existing revenue budget. As comparitor is now 18 months old may need to revisit assumption but currently 23 fte I.T. resource available for all development projects across the C 3,319

Mixture of transferred MKC staff and SAP consultants

Operating Costs

Operating budgets within existing MKC revenue budgets. May need to increase budgets dependant upon up to date costing of projects. Note that all increases in operating costs have so far been absorbed within existing revenue budgets, whilst revenue cuts 6,549

New operating costs arising from HBS investments

Transition & Management Costs Not Applicable 9,038

HBS management costs and other overheads.

2,452 20,984


Summary of the HBS Offer Appendix 3

Through this partnership, HBS’s offer to Milton Keynes Council is to:

Deliver £23m investment in technology, systems and processes

Transform citizen access to Council services, providing wide choice of public access channels

Facilitate greater focus on front line professional service delivery

Provide continuous improvement in support services to the Council

Provide measures to care for transferring staff

Price the service at a level that will provide the Council with revenue savings

Overall Approach

Ø Fundamentally transform the Council’s interaction with citizens through significant investment in public access strategies

Ø Investment in a 3-year ICT programme supporting the Council’s drive to meet e-Govt. targets

Ø Guaranteed standards of service delivery - through agreed Service Levels and Key Performance Indicators

Ø Pricing that will provide revenue savings to provide member’s with choice on future service improvement strategies

Ø Balanced profile of shared risk and reward

Ø Delivery of local services from bases located within the Council’s geographical area

Ø Commitment to the Council’s agenda of Caring for Staff through:

Ø Security of Admitted Body Status (with access to pension bond funding).

Ø Structured staff transfer and communication programme

Ø Management development for transferring managers with shared development opportunity for the Manager’s Assembly

Ø Opportunities for all staff through business growth

Ø Opportunities for secondment experience in the wider HBS group

Ø An accommodation strategy supporting the Council’s needs

Ø An active and involved Partnership Framework that differentiates from an outsourcing arrangement, ensuring the Council’s strategic issues are addressed.


Service Stream: Information & Communication Technology (ICT) & electronic government (e-govt)

A. Overall ICT Service Provision:

Investment in ICT to facilitate:

• Support in delivering public access and e-Govt. targets.

• Implementation of back office and public access services using SAP software

• Improvement in the technical infrastructure and ICT support services

• Significant ICT development project resources included within the price

• Project management in line with recognised professional standards such as Prince 2

• Completion of systems work associated with the National Land Information Service and the Local Land and Property Gazetteer

• Provision of improved use of systems management tools, enabling more efficient service delivery.

• Delivery of a new Property Management system and Help Desk.

B. Programme and Change Management:

• Programme management of the implementation of new SAP systems across the Council.

• Provision of programme direction, measurement and reporting.

• Work with the client side on the business model and support the organisation of change teams.

C. SAP Systems:

• Provision of SAP R/3 application suite to provide an integrated system to support HR, Payroll, Finance, Asset Management and Procurement.

• Investment in a SAP Citizen Relationship Management System.

• Implementation of a Members Portal providing members with access to information through a web-based browser.

• SAP Enterprise Portal provides access to information through a web-based browser.

• Provision of an SAP licence for PC’s connected to the Council’s network.


D. Public Access Programme:

Addressing the public access agenda through:

• An approach aiming to support multiple access channels such as telephone, Internet, e-mail and face to face contacts.

• Provision of a 40-seat contact centre in Civic Offices.

• Integrated approach to handling Council enquiries, including a Citizen Relationship Management system

• Aiming for 80% resolution at first call to Council for those services and processes delivered through the Contact Centre.

• Scripted responses to frequently asked questions and easily answerable questions – the depth and breadth increasing over time

• A secure means for citizens to access services through MKWeb.

• Delivery of electronic forms and web transactions using Formfill.

• Provision of a one stop shop in the refurbished reception of the Civic Offices

• Contribution towards the development of further one-stop shops in up to five other locations.

• Investment to develop NLIS capability to level 3

E. Training Programme:

• Provision of training appropriate to their licensed requirements for transferred and retained service staff in the new SAP systems.

F. Technical Infrastructure:

• Replacement and upgrading of computer hardware, software and communications components for transferred services on a 3/5 year cycle

Service Stream: Revenues & Benefits

Ø Integrated single team combining Revenues and Benefits activities

Ø Revenues, benefits and cash office at single point


Ø Establish front office/back office split to enhance efficiency and effectiveness of service delivery

Ø Continue to develop migration to new software adopted by Council.

Ø Proposed improvements to business processes, communication, IT development, training and publicity

Ø Improved performance, including speed of processing and accuracy

Ø Improved collection rates for Council Tax and NNDR

Ø Work towards Charter Mark and ISO accreditations

Ø Upper quartile performance within first 3 years of contract operation

Service Stream: Finance

Ø Introduce new financial systems as part of integrated corporate systems approach to deliver substantial functionality benefits, including access to real-time data

Ø Enable enhanced system accessibility for the customer, including devolved data input

Ø Streamlining of Business Processes, automating processes wherever possible.

Ø Restructure finance teams to capture service, activity and team synergies

Ø Key advisers co-located with directorates

Ø Complete debt recovery service offered within Finance Service, assisted by SAP functionality e.g. dunning letters.

Service Stream: Human Resources (HR)

Ø Improved service delivery through investment in people, systems and processes

Ø Strategic and pro-active HR Advisory service

Ø HR software integrated with Council-wide solutions

Ø Delivering recruitment, training and development services

Ø Supporting policy and strategy development

Ø Support the deployment of a range of e-based learning opportunities according to Council priorities and budgets for more inclusive learning

Ø Enhance strategic capability by networking across HBS HR community


Service Stream: Administrative Support

Ø Common activities centralised wherever appropriate

Ø Establish Administrative Support Units for each Directorate, headed by a Service Delivery Manager

Ø Continuity of service protected by team based service approach

Ø Provide Digital Dictation Technology

Ø Create a virtual word processing unit.

Ø Removal of barriers between service directorates to ensure efficient and effective service delivery across Council

Service Stream: Procurement, Contract, and Performance Management

Contract management

The establishment of a contract and performance management unit to include the delivery of best practice procurement and contract management principles and the active contract management of the following services:

• Contract Management of Bridge Management, Highway Asset Management and Highway Improvements

• Contract Management and Monitoring of Fleet Management

• GIS

• Highway Maintenance & Service Delivery

• Administration of New Roads & Street-works Act

• Processing, Administration and Monitoring of Parking Services

• Contract Management and Monitoring of Passenger Transport

• Contract Management and Monitoring of Street Lighting

Ø The establishment of a Contract and Performance Management Unit that will act as Managing Agent for the above services, rather than as direct provider.

Ø The Unit would act as managing agent for the Council in respect of securing the provision of the above services and ensuring delivery in accordance with the agreed service levels. The Unit would have a contract management and procurement role.

Ø Removal of duplication via delivery of contract management policy and principles through one professionally focused team, serving all the Council activities, enhancing quality management


Ø Delivery of service via multi channel access, with single point of receipt for queries re managed services

Ø Development of performance management regime

Ø Recognition and application of Best Value principles in all contracted activities

Procurement

Ø Guaranteed net savings commitment to the Council of at least £2.8m with further opportunity for additional savings on a project by project basis to jointly drive out savings and implement more efficient buying practices

Ø Ring-fencing of CBC contract buying to protect the Council’s membership of the consortium

Ø Development and implementation of a procurement strategy focussing on efficient buying practice and compliance with Best Value criteria

Ø Provision of an internal procurement consultancy and advice centre to support good buying and supplement local service knowledge.

Ø Increased buying and contract management discipline throughout the Council

Ø Establishment and monitoring of internal and external KPIs

Ø Management and monitoring of suppliers and their subsequent performance

Ø Provision of up to date and accurate management information facilitating better informed decisions and minimising the Council’s risk exposure

Ø Benchmarking data and methodology to support Best Value

Service Stream: Estate Management and Facilities Management

Ø Bring disparate property teams together - Facilities Management, Estate Management and

Valuation to create a unified Property Service Stream

Ø Single integrated property service for the Council

Ø Strategic alliance with Architecture MK

Ø FM will be included as part of a wider HBS property management service

Ø Investment in a Property Management system

Ø Enhancement of intelligent helpdesk facility


Service Stream: Office Accommodation

Ø HBS staff will co-locate with Milton Keynes staff in Saxon Court and Lloyds Court until

leases expire in 2007 and 2008

Ø Provision of a Business Centre housing back office services in an area of regeneration e.g. Bletchley. [HBS remains flexible about office accommodation solutions and is continuing consultation and in depth discussion related to Civic Hub proposals and the Council’s emerging accommodation strategy.]

Ø HBS accommodation strategy is delivered through leasehold options

Ø Creation of a One Stop Shop and Contact Centre in Civic Offices.

Appendix 4

Partner Risk Allocation Matrix – Top Eleven Risks

Risk Number

Description Current Allocation

Allocation under the Partnership (Partner/Council/Shared)

Treatment of Risk in the Partnership Arrangement

1 The services provided by the Partner do not meet the specified outputs

Council Partner Council entitled to make price deductions via the Price Performance Mechanism in the Contract. Council may also claim losses, step-in or ultimately terminate Contract for breach if necessary.

2 Council unable to manage contract effectively

Council Council Council has employed a private sector contract manager to manage the contract. The Council has kept a sizeable client to provide a specialist advice. The contract contains a variety of mechanisms to control the partnership.

3 Implementation of SAP is not completed to schedule and delays in improved service provision ensue

N/A Partner Council entitled to apply Liquidated Damages to late delivery/implementation of key transition phase milestones (where Council can evidence real loss). Costs of delay will be borne by Partner. Exceptional delays will trigger the long stop date and

T ITEM 4 26 NOVEMBER 2003 Page 30

result in termination for breach.

4 Implementation of SAP exposes the Council to additional variation costs not previously identified by the Partner during contract negotiations.

N/A Partner Council’s advisors (NCC and Eversheds) tasked with ensuring that this risk is placed with the Partner via the contract, and the ICT Service Level Agreement and contract schedules. Update will be given prior to 04 November 2003.

5 Partner becomes insolvent

N/A Partner Council entitled to terminate the Contract for breach forthwith

6 Partner commits a material or persistent breach of contract

N/A Partner Council entitled to terminate the Contract for breach if breach is not remedied within the specified period. Additional protection in form of bonds to cover Council costs.

7 Poor performance of Services causes Council losses (eg. Loss of Benefit Subsidy)

Council Partner and Council Council entitled to recover 100% of losses from the Partner up to a predefined financial limit. Exposure shared thereafter on a sliding scale.

8 Liability for breach of Health and Safety Regulations in relation to the Services provided by the Partner.

Council Partner Risk retained by Council only in relation to the Retained Function.

9 Cultural Change – the Partner does not

Council Partner Partner must ensure that cultural change in managed effectively or


achieve the required change in culture in order to effectively deliver service improvements

risk deductions under the Price Performance Mechanism.

10 Partner does not achieve Procurement Savings

Council Partner Partner has guaranteed £2.8M. This risk to be viewed as an opportunity for the Council as Council would not be able to guarantee a procurement saving if it were to implement a procurement improvement programme independently..

11 Continuous Improvement is not achieved

Council Partner and Council For Partner driven through the continuous improvement embedded in the Performance Indicators. Council (Retained Function) retains the risk on its non performance.


Appendix 5

Managing Partnership Operations – Governance proposals

(1)1.1.1.Partnership Forum

Purpose MKC representatives

HBS representatives

Key outputs Suggested alignment with existing management structures

National Partnership Forum

Meets annually

Networking with HBS local govt. partnerships at national level to share challenges and opportunities for best practice

CE

Leader and Deputy Leader

CE

COO

RMD

Development opportunities

HBS national forum

Local govt. network

Southern Region Partnership Board

Meets twice a year

Networking with HBS local govt. partnerships at regional level to share challenges and opportunities for best practice

CE

Leader and Deputy Leader

COO

RMD

RFD

PDs

Joint working initiatives

Local govt. network

Partnership Strategy Group

Sets the culture and tone of the MKC partnership and guides and monitors its strategic direction

CE

Directorate Heads

CE / COO

RMD

Vision and values

Strategic Development Plans

HBS Investment Board


Meets bi-monthly

its strategic direction Portfolio Holder for PPP

RFD

Partnership Director

Plans

Partnership fit to CPA improvement programme

Partnership Executive Review Board

Meets monthly

Formally reviews and signs off performance (e.g. KPIs / financial targets / transition project) progress)

CE

Directorate Heads

Partnership Delivery Manager

RMD / RFD

Partnership Director

Head of Operations

Transition Manager

Authorised change control and variations

Authorised business cases for project work

HBS Regional Board

MKC COB

Business Improvement Project Board – see section below


Contract Review Group

Meets at least monthly

Reviews service delivery and performance against contract targets (e.g. KPIs / financial targets / transition project) and initiates / monitors remedial actions


Key client managers

Partnership Director /

Head of Operations

Commercial Controller

Transition Manager

BRMs

Agreed KPI performance report

Highlight report on transition projects

List of WIP projects

Initiates change control or variations to contract

None

Service User Meetings

Meets at least monthly

Review service operations and issues resolution

Client Managers

Heads of Service Users

Head of Operations / individual Heads of Service

BRMs

Issues and Actions logs for resolution and / or escalation

Service team meetings


Managing Business Improvement

Partnership Forum Purpose MKC representatives

HBS representatives

Key outputs Suggested alignment with existing management structures

Business Improvement Project Board

Meets monthly

Project commissioning and reporting

CE or nominee


Senior stakeholder/s

Partnership Director / Transition Manager

Commercial Controller

Compilation of project highlight reports for upward review

Programme and project plans

Business cases for approval

HBS Investment Board

HBS Project Boards

MKC Performance Reference Group

MKC project teams

Business Improvement Project Team meeting

Meet as required under project structure

Project delivery and reporting

Project Manager Project Manager Project reporting

Project delivery

Compliance with PRINCE2

CPA project teams

Transition projects teams

MKC Scrutiny Oversee the performance of the Partnership

Nominated Scrutiny Body

As required Reports on Performance

It is suggested that the Business Improvement Project Board meets as a project focused sub set of the Partnership Executive Board


Appendix 6

Pensions and Performance Bonds

KEY ISSUES

1. Introduction

1.1 The risks identified below have been discussed in detail with Eversheds LLP, Watson Wyatt LLP and Deloitte & Touche prior to discussion with HBS.

1.2 All of the Councils’ advisers are of the view that each Council is entitled to take a view as to the appropriate level of risk to be covered by bonds, but the Councils’ views must be supported by an appropriate detailed analysis of the risks, the bond level on offer from HBS, the benefits of the Partnership to the Councils and the resources available to the Council in the event that any of these risks materialise and the bond is insufficient to meet all of the financial consequences.

2. Admitted Body Status - Pension Bond

The purpose of the pensions bonds is to make up any deficit remaining in the pension Fund, attributable to HBS’ period of participation in the Funds, in the event that HBS was to go into liquidation without having made the relevant contributions to the Funds. Whilst the bonds are procured in favour of each Administering Authority, they are essentially for the protection of each Council, as it would be the responsibility of each Council to make up any deficit in the Funds (to the extent that such deficits have not been eliminated by HBS or covered by the bonds).

2.1 Advice was obtained from Watson Wyatt LLP, actuarial advisers to both Northamptonshire and Buckinghamshire pension fund as to the level of bond required by the Council.

2.2 Analysis of risks

2.2.1 The redundancy/early retirement risk would arise in the event that on termination of the contract (as opposed to expiry at the end of its natural term) employees of 50 years of age or over within the Admitted Body Pension Scheme could claim to be redundant and, in particular, could claim early retirement with no actuarial reduction to pension.


The risk of this expense being incurred in practice can be mitigated in a number of ways including: -

(a) in all likelihood, relevant staff would transfer back to the Council under TUPE and little or no redundancy would occur (assuming no fundamental change in legislation);

(b) contractual business continuity arrangements, including “TUPE out” provisions are being negotiated into the contract which will reduce this risk further.

2.2.2 The potential deficiency arising from excess salary awards by HBS assumes that HBS may make salary awards that exceed local government national pay awards. HBS have offered to remove this risk by committing themselves within the contract to not increasing salary costs in any year by a percentage which exceeds that awarded under national local government negotiations. This would significantly mitigate the risk although there is also the possibility of some individuals receiving higher awards.

2.2.3 The investment performance of the fund is of course subject to movements in the equity market. Members will be aware of the impact this has had on the whole pensions sector in the recent past. HBS have indicated that they are not prepared to accept this risk. An approach that would significantly reduce the requirement for a bond would be for the Council to retain the investment risk and negotiate the transfer of all the early payment liabilities (e.g. early retirement and ill health retirement) to HBS.

2.3 Taking all of the above points together, it would be open to the Council to accept an admitted body status bond level of £1.0m based upon:-

(a) accepting HBS offer in relation to the salary increase risk, although recognising that some residual risk may exist for individual changes within the overall cap and holding a bond of £500k to cater for this

(b) taking a view that the redundancy/early retirement risk is unlikely to arise in practice because of the underlying legal and contractual position, which could justify a significantly reduced position. But in order to be prudent, to hold a bond of £500k against this risk.


(c) retaining the investment risk, but transferring the early payment liabilities to HBS.

The Administering Authority must also be satisfied with this position.

2.4 As indicated above, all this has to be assessed in the context of the advantages to the Council of entering into the strategic partnership and also against the resources available to the Council to manage any of these risks were they, against expectation, to materialise to a degree which required the Council to find resources beyond that covered by the pensions bond. Given the Council’s current level of balances it is clear that the Council cannot afford to take a high risk position.

3. Performance Bond

3.1 The purpose of the performance bond is to provide a lump sum to enable the Council to meet the costs of business interruption and re-procurement on early termination of the contract in the event of default by HBS.

3.2 In order to facilitate a decision, the Council needs to set out its assumptions as to the circumstances which would apply on early termination. The Council’s advisers feel that the following is a reasonable scenario which reflects the approach in the draft contract:

3.2.1 The contract makes appropriate provisions for Council access to IT licences, templates, IPR and configurations on termination

3.2.2 HBS staff delivering Council services at the time of termination transfer back

3.2.3 IT kit will have limited value to other organisations and so should be easily accessible given the proposed contractual approach.

3.2.4 The Council will incur a range of costs eg re-procurement and interim management costs, that will need to be met should HBS go into liquidation. It is therefore proposed to hold a performance bond of £2.1m to meet these costs.

Of course, guaranteed savings will be lost post-termination and the bond does not provide for this.

3.3 The overall task is to identify a bond level which provides for the above assumptions, which is commercially acceptable to HBS, and which gives the


Council sufficient comfort against circumstances where a different, or more expensive, situation could arise. The Council would have to be satisfied that other sources would be manageable within its overall resource base.

3.4 In summary, the position for the Council in relation to performance bonds is therefore similar to that described in paragraph 2.5 in respect of pensions bonds. The Council is entitled to take a view having regard to the circumstances they believe will apply on termination but taking account of the benefits of the Partnership and taking account of the resources it would have available to deal with any contingencies which may arise. Again the level of balances held by the council is relevant to the risks it can accept.

4. Conclusions

4.1 Commercially, HBS are unlikely to move from a figure of £8m which they have offered to cover both pensions and performance bonds for both Councils or at least any movement is likely to be hard won and marginal.

4.2 An appropriate “pro rata” split between the two Councils bearing in mind the different contract values would be approximately £5m for Northamptonshire and £3m for Milton Keynes. Whilst such a sharing of the overall bond has been informally accepted, there has been no formal agreement between the Councils on such a division. The Council could, of course, notify HBS of the bond levels required and seek agreement directly from them.


OVERVIEW OF PPP AGREEMENT Appendix 7

This paper is designed to give Members an insight into the structure of the Contract, the mechanisms in place which will provide the Council with flexibility as the partnership progresses and the protection offered to the Council in the event of HBS default.

This paper captures the position reached to date following several weeks of intense negotiations and the Contract has been updated accordingly and will be re-issued to HBS for final review 29 October 2003.

The objective of the negotiation is that at the end of this process the Council will have a document that is thorough, challenges HBS to improve service provision to the Council and yet provides the Council with flexibility and protection in the event of HBS default. The draft Contract has been used and developed over the past three years on a number of strategic partnering arrangements and has been tailored to meet the needs of the Councill. Therefore we are able to say, with confidence, that the mechanisms within the Contract have been tried and tested elsewhere.

Structure of the Contract

The PPP Agreement is made up of the core Contract, the Schedules and the Service Level Agreements (SLAs). The Contract will take precedence over all other documentation and contain high level provisions on the services to be provided by HBS, the terms upon which HBS are monitored in relation to their performance and remedies and termination provisions available to the Council. The Schedules will provide detail in relation to individual topics such as pricing, projects and employment policies. The Service Level Agreement for each service provided by HBS is, effectively a specification of the Services to be provided by HBS and a statement of the standards they are expected to achieve.

The legal provisions within the Contract fall within Parts A to J. A high level summary of some of the key provisions within each of these parts is set out below together with an explanation of how some of the mechanisms will work in practice.

5. Part A - Definitions and Interpretations

5.1 Part A sets out the meanings to be attributed to all the definitions used within the Contract. This section also includes provision on how drafting within the Contract is to be interpreted.

6. Part B - Term

6.1 This section sets out the term of the contract. There is also provision for the Council to extend the term of the Contract should both parties wish. It is initiated by the Council serving notice upon HBS in relation to the extension. The Council may wish to extend the term if it is satisfied with its arrangement with HBS, however any extension period will be subject to a maximum duration of 5 years. Any extension may involve some adjustment to the contract terms and will be subject to both parties reaching agreement. If the Council wanted to renew its relationship with HBS (or another party) long term we would


recommend that this is regulated by a new contract at that point in time in order to capture the Council’s change in requirements.

In negotiation it has been agreed with HBS that any extension period operates for a minimum of 12 months and that the terms of any extension (whether short or long term) are agreed at least 6 months prior to expiry of the original term. The Contract also contains provision for a run off period of up to 6 months which will operate on the ending of the contractual term whenever that occurs. Run off is essentially a practical arrangement to carry forward a level of service whilst the Council makes arrangements for future service provision. The level and extent of service in run off, particularly in circumstances where HBS is in breach of Contract a re the subject of continuing discussions.

7. Part C - The Strategic Partnership

7.1 This Part sets out how the Partnership will operate and contains some of the key services that will be delivered as part of the Partnership arrangement.

7.2 It is intended that the Partnership will be managed by a Partnership Board made up of Council and HBS representatives. The management structure, the objectives and the operation of the Partnership are set out in outline within the Contract and supported by a Schedule which provides further details and workings of how the Partnership shall work on a day to day basis.

7.3 Within the Partnership, HBS will be primarily responsible for putting forward ideas and developing these (with Council approval) into business cases and projects. The objectives behind the projects may be to generate further efficiencies and savings for the Council or promote a community benefit. These individual projects are not included within the contract price and present opportunities for the Council to pursue improvements as the Partnership progresses. The Council can also put forward ideas for HBS to develop into projects. It can propose up to six ideas for Outline Business Cases per year within Contract Price, after this the Council would incur additional costs of HBS for the preparation time in developing the Outline Business Cases.

7.4 Part C also contains the high level provisions in relation to ICT upgrade and rollout, public access, procurement, financial services, HR, property, business support, management information, accommodation and property development. These high level obligations reflect the more detailed obligations placed upon HBS within the individual Schedules and Service Level Agreements.

7.5 The high level provisions regarding ICT and Public Access are yet to be conformed with the progress made on the ICT and Public Access Service Level Agreements. However, HBS has agreed the basic structure for ICT reflecting the difference in HBS commitment to in scope and retained ICT.

8. Part D - Service Transition

8.1 This section sets out how HBS will manage the transition of services from the Council to the Partner. It includes placing obligations on HBS to have a team and manager in place to oversee the transition. During the transition phase agreed work-in progress, records and data, agreements and assets in relation


to the services transferred (including lease assets) will fall within HBS’s management responsibilities. There are ongoing discussions regarding some technical detailed points regarding treatment of existing agreements and regarding the extent to which existing data and records will transfer.

8.2 The Council is not providing warranties to HBS regarding the services or the state of the existing assets. However the Council is warranting that some of the HR information regarding transferring employees is accurate to the best of the Council’s knowledge and belief. In addition HBS is requiring relief and compensation if any of the information provided by the Council during the due diligence phase is inaccurate or incomplete. There are ongoing discussions; in principle the Council has agreed a form of relief (from performance obligations) in relation to failures of legacy systems.

9. Part E - Operation of the Partnership

9.1 Part E contains provisions in relation to:-

(i) how the Council will review HBS’s progress monthly and annually;

(ii) how HBS will manage the Contract;

(iii) how any changes that occur during the life of the Contract

will be managed; and

(iv) provisions in relation to the transferring staff.

Reviews and Management

9.2 HBS will be under an obligation to produce annual Service Development plans for the Council that set out the strategic focus of the Partnership for the next 3 years, including current and proposed projects. This will assist the Council in managing its objectives and budgets.

9.3 HBS’s performance will be reviewed both monthly and annually. In reviewing HBS’s monthly performance the Council will use the target performance levels set out in each Service Level Agreements in order to assess whether HBS have met each relevant target. In the event that HBS have failed to meet the required target, this information will be used by the Council to assess whether there should be any deduction in monthly charge for that month. Each service will be reviewed annually and some elements of each service may only have annual targets. Again the annual reviews will be used to assess whether HBS is delivering the services according to the Contract. Current discussions are progressing with HBS in relation to the establishment of a process whereby at each annual review there will be opportunity for service levels within the SLAs to be reviewed to ensure HBS are consistently working towards a realistic but challenging target for service improvement for the Council. This is not yet agreed.

9.4 There are obligations placed upon HBS to assist and comply with the Council’s requirements under Best Value and Comprehensive Performance Assessment (CPA); at least some of this work may be undertaken as part of change control.


HBS must also cooperate and provide information in relation to future performance assessment regimes. There is no obligation on HBS to benchmark the services following negotiations with HBS. However the Council may carry out a benchmarking exercise to assess HBS’s performance of the services.

9.5 Both HBS and the Council are responsible for appointing Partnership Managers to take forward the day to day management of the partnership. HBS will also be under an obligation to assist the Council in any proceedings it becomes involved with and co-operate in any internal Council meetings such as Overview and Scrutiny or Council Management Team meetings.

Transferring Staff

9.6 Provisions are included within the Contract to ensure that all transferring staff transfer under the Transfer of Undertaking Regulations (TUPE). This provides protection for employee’s terms and conditions when transferring to another employer. Additional provisions are also incorporated into the Contract to ensure that HBS uses reasonable endeavours to avoid compulsory redundancies, employs the employees in the same area (ie that of Milton Keynes), uses reasonable endeavours to avoid disputes with employees and maintains their continuity of service. A re-deployment protocol will be developed to govern how HBS re-deploy employees during the course of the Partnership (although this will not form part of the Contract) and there are provisions to recognise the benefits employees get from their current employment contracts (including pensions provisions).

9.7 As drafted, the Contract also has provisions in place to ensure HBS recruits good quality personnel to provide the Council services and provides the Council with protection that HBS will not solicit any Council personnel to work for HBS within specified timescales.

Variations to the Contract

9.8 Over the life of the Contract there may be changes in the Council’s requirements for the scope of the services to be provided. The variation and change control provision in the Contract legislates the circumstances in which changes are required. Some specific changes will be classed as “in-scope”, for example small changes in numbers of IT users in the Council services, which are within defined parameters. Changes that are in-scope will not impact on contract price and HBS will be required to undertake the change accordingly. However, all other Contract changes outside those specifically defined will be “unscoped”. In these circumstances HBS would be asked to put forward a proposal that contains an impact assessment of the change, how HBS would implement the change and any impact on the contract price as a result. It is recognised that provisions such as these are necessary within a long term partnership arrangement to promote the flow of ideas and development of the relationship between Council and Partner. This is particularly so in long term contract arrangements.

10. Part F - Provisions in relation to Assets


10.1 This section sets out the ownership and management arrangements for the records, data and assets for the term of the Contract. HBS will be responsible for managing information in the provision of the services to the Council and maintaining accurate records. Discussions are ongoing as to the precise records, data which will be managed and as to the detail of the responsibilities to be undertaken by HBS.

10.2 The section sets out how HBS will manage the implementation of new assets and provide upgrades, maintenance and support to assets. This section also sets out the Council’s and HBS’s respective intellectual property rights in relation to material in existence prior to the Partnership and created during the Partnership.

11. Part G - Performance

11.1 Part G places obligations upon HBS to comply with the timescales within each of the PPP documents and sets out the warranties and indemnities the Council is seeking from HBS. Warranties and indemnities provide the Council with protection in the event of HBS breach of the terms of the PPP Agreement. The warranties and indemnities clauses are subject to ongoing negotiations.

11.2 There is also provision here for the Council and HBS to cap their liability in relation to the Contract. Negotiations are in process and the outcome will be provided as an update to this report.

12. Part H - Pricing and Payment

12.1 This section contains all the provisions in relation to contract payment. There are provisions setting out the Contract Price and the high level details for the operation of the price performance mechanism whereby deductions are made to the monthly price in the event of HBS not achieving the relevant performance target (see paragraph 5.3 above).

12.2 The procedure for the submission and payment of invoices, the rate of interest to be used in the event of late payment, provisions in relation to VAT and the relevant indices to be used in calculating indexation during the term of the Contract are also included. The Contract also contains a right of set off for the Council to set off any agreed amount owed from HBS against the sums payable by the Council to HBS.

13. Part I - Non-Performance, Termination and Other Remedies Exit Provisions

13.1 Part I contains all the provisions which legislate how the Contract will operate and any actions the Council may take in the event of HBS’s default. It includes placing obligations upon HBS to monitor complaints utilising the Council’s existing procedures, compliance by HBS with Council audit rights, setting out a framework for the resolution of any dispute that arises during the Partnership, termination events and termination consequences.

Step In


13.2 A right is provided for the Council to step-in, and perform any service where HBS is failing or if this is needed to maintain business continuity. Provision is made for the Council to be compensated for its costs as a result of taking such action, although the extent to which the Council can recover its costs is limited where HBS is not actually in breach of this Agreement. This is subject to further discussion including a demand by HBS to recover its costs arising from a Council step in for business continuity reasons. Where HBS can demonstrate to the Council’s satisfaction that it will be able to continue to provide the service affected by the step-in there is provision for the Council to step out of performing the service and for HBS to continue with its general service provision.

Termination

13.3 The Council is provided with a right to terminate the Agreement in the event of HBS’s breach in whole or in part. Examples of termination might include, termination for persistent breach where HBS consistently fails to reach performance targets within the SLAs or material breach, examples being where HBS has exceeded its cap on liability or failed to procure the granting/extension or renewal of the performance or guarantee bond. In some circumstances HBS will have an opportunity to remedy the breach and this would usually involve HBS putting forward and implementing an action plan to make good the breach. In the case of persistent breach HBS are requiring a series of warning notices before the Council can terminate. This is under discussion. The Council also has a right to terminate in the event of HBS insolvency. .

13.4 Provision is also made for termination in circumstances where both parties are placed in a position where they cannot continue to perform the Contract. This situation would arise where a force majeure event occurs. Examples of force majeure events include war or national emergency, fire, flood, lockouts and acts of God or acts of any UK government or super national authority. The Council may also terminate in defined circumstances where HBS is involved with corrupt gifts.

13.5 Provision is also made in the Contract for the Council to terminate the Agreement in whole or in part at will. If the Council were to pursue this option, HBS would be entitled to additional compensation as a result of the no fault termination and therefore in reality it is unlikely the Council would ever exercise its rights here.

13.6 The Agreement also provides for termination by HBS. The precise circumstances of where this would operate are subject to ongoing negotiation and will be limited to a prescribed set of circumstances.

Termination - Transition and Consequences

13.7 As stated above, the Council may terminate for HBS breach in whole or in part or terminate the Agreement at will in whole or in part. The Council and HBS have agreed a matrix that details the compensation payable between the parties upon early termination of the Agreement.


13.8 Just as the Contract sets out provisions for the transfer of assets, agreements, data and staff to HBS at the commencement date, so too does it set out the procedures to be followed upon the transfer back of such assets agreements, data and staff at termination. The overriding aim within these clauses is to ensure business continuity and smooth transition of services back to the Council (or a third party). There are detailed discussions ongoing regarding the forms of finance which HBS may deploy beyond the initial tranch of new assets and the impact which these may have on the level of security that the Council has regarding options to acquire such assets.

Bond

13.9 The Contract will also include the bond agreed between HBS and the Council.

14. Part J - General Provisions

14.1 The remainder of the Contract picks up other outstanding issues that commonly are dealt with and negotiated in arrangements of this sort. These include ensuring that HBS complies with all laws that are in place now and from time to time in the future. There are also provisions which govern how and to what extent HBS and the Council can advertise/publicise the Partnership. There are key provisions in relation to insurance to ensure HBS has all relevant and appropriate insurances in place in providing the services, provisions governing the right of HBS to sub-contract the services and confidentiality provisions. The insurance provisions are still to be negotiated in detail.

15. Schedules

15.1 The Contract is accompanied by Schedules which provide the details on the Services to be delivered by HBS and the processes which HBS will go through in order to deliver the Services e.g. on transition.

16. Service Level Agreements

16.1 Service Level Agreements will form a Schedule under the Contract. There will be a Service Level Agreement per service transferring to HBS. The Council has been primarily responsible for developing these documents and then negotiating these with HBS.

Documents

ITEM 4 TREASURY OVERVIEW COMMITTEE 26 NOVEMBER …