Taking the soft FM out of PFI – a clean solution?

Many reviews and strategies as to how to improve the efficiencies and affordability of PFI projects have pointed to the possibility of removing soft services from such projects.  For example, the Treasury's call for evidence for the reform of PFI issued last December directly asked respondents whether soft services should continue to be included within the contractual model, as well as other related questions as to the alternative approaches and potential impacts of contracting these services separately.  Additionally, the review of soft services specification and its value for money in operational projects was one of the main recommendations set out within the Treasury's draft guidance published last July.

More recently, the Secretary of State for Education's statement at the end of May (in relation to the much awaited announcement on the Priority School Building Programme (PSBP)) indicated "I have previously expressed my strong support for the Government's agenda on reforming the PFI model and we are working closely with the Treasury to ensure the PSBP is aligned with this model in providing cost effective and more transparent delivery of services.  Schools will have greater flexibility - with soft facilities management, such as cleaning, catering, security and some grounds maintenance being managed and controlled by schools themselves."  This is perhaps the strongest indication that the market has had to date that this may be part of the reform of PFI.  Whilst it is not clear if this is going to be mandatory, the industry should consider now the possible implications of removing soft services from future PFI projects.

It is worth noting that this concept is not new.  Indeed, SoPC4, which was published over 5 years ago in 2007, states (at section 3.8) that "Authorities should consider carefully, at an early stage in their procurement planning, the range of services which need to be provided through the Contract.  In particular they should consider whether or not it offers value for money to include soft services as part of the range of services to be provided."  And yet the majority of PFI projects to date (other than BSF projects where the provision of soft services as part of the PFI was often optional) have included soft services within Project Co's remit.

In the event that soft services in future projects are to be provided by a third party, rather than by Project Co / their relevant subcontractor, then a number of amendments will need to be made to the contractual documentation and standard forms in place and we can only assume that this will be included in the updated suite of documents which may follow any announcement from the Government in relation to the reform of PFI.

However, having a third party provide a number of elements of the services does create a disjoint contractually and this will be greater still if the public authority contracts with a number of separate entities to carry out a range of soft services (for example, different entities for cleaning, catering, gardening, security etc). 

Firstly, how and when will separate soft services be procured by the Local Authority / Trust?  Will this, in effect, result in two procurement streams needing to be managed in tandem by the Local Authority / Trust?  If so, then this would, on first glance, appear to be contrary to the Government's aim (and the wider PFI industry's undoubted desire) to speed up the procurement of new projects.  Will such entities be involved in the procurement of the PFI project itself, for example in relation to design development (so that the soft services entities can price their services more accurately) and, if so, will the public authority take responsibility for their input on any such design – presumably so?

Moreover, it is not clear at present as to how the contractual disjoint will work in relation to the interface between hard services provider, soft services provider and building contractor.   Whilst there has been no standard form of interface agreement in place to date, the over arching principles within interface agreements are generally mirrored across projects.  Therefore, the parties of future PFI projects where soft services are not part of the PFI remit will need to consider how the interface practicalities and responsibility for deductions, service failure points etc arising from another parties' default, breach, action or omission, are to be dealt with across the various contractual streams. 

For example, if the Local Authority / Trust's soft services provider cleans floor coverings within the PFI asset with an unsuitable cleaning substance which leads to a fault in the flooring which consequentially leads to unavailability – then how will this be addressed contractually?  Will the third party soft services provider be expected to enter into interface provisions directly with the hard services provider and building contractor?  This seems unlikely and would complicate the contractual documentation further still.  It is more probable that the risk of unavailability arising from the soft services will be included within an expansion of excusing causes within the project agreement.  Such new excusing causes would possibly be akin to those in existence relating to damage by Authority Related Parties and undoubtedly will raise questions as to how causation would be determined. 

Given the size of the assets in question (hospitals, schools etc) will the contractors providing such third party soft services actually be any different from those currently engaged within the PFI market?  It's unlikely that funders will accept soft services being provided by a sole trader / small local company or, indeed, that such small companies would be capable of providing such services for a big hospital / school to the necessary standards, including health and safety standards.  By taking out soft services from a PFI, however, the relevant Local Authority / Trust should be in a position to procure the necessary soft services without the associated "PFI premium" (and without impacting to a significant extent on the whole life design / cost benefit that is one of the key rationales for PFI procurement in the first place), although the extent of the saving to be made by adopting this model is yet to be fully tested.

Soft services are possibly the most visible element of the asset to the majority of the asset's users - e.g. cleaning and catering – and subjective in nature in terms of measuring end users' satisfaction with such services.  Given the current negative view of PFI projects, in the event that the soft services provision by the Local Authority / Trust's provider is substandard, is this going to assist the private sector in demonstrating the benefits of PFI - or will the bad press continue to fall on the private sector?

Finally, one of points reflected in a number of the recent reports on PFI has pointed to the apparent lack of personnel within the public sector who have the requisite skills which are needed to manage and oversee complex major projects.  By complicating the contractual structure further still, it is not certain as to how such projects will be managed by the public sector and how adequate management will be determined.

The removal of soft services undoubtedly raises a number of questions and those within the industry are hoping that there will be more clarity as to how provision of soft services by another party will work in the much anticipated report on PFI Reform due out this year.  It was hoped that the review's findings would be published before the summer recess (in July) but at the time of writing it would seem that they will not be published until after recess (which takes place in September) which may well match with the first of the PSBP schools being put out for procurement.  Query, however, how the PSBP model will be aligned with any revised PFI model if there is any further delay in publication of the PFI reform's review.  It may well be that the exclusion of soft services from future PFI projects will not be mandatory but will be assessed on a project by project basis in terms of value for money (perhaps with more scrutiny than has been in place to date), in which case is the situation really going to change to that in place currently?