Not for publication as the report contains exempt information relating to the financial or business affairs of particular persons (Local Government Act 1972, Schedule 12A, Part I, Paragraph 7)
Cabinet – 20th June 2001
Sandhill View PFI Project
Report of City Treasurer, Director of Education and Community Services, and Director of Contracting Services
1. Purpose of the Report
1.1 To advise Cabinet of the proposed key legal, financial and commercial terms of the Sandhill View PFI project (the Project) and to authorise officers to conclude the negotiations and execute the relevant documentation.
1.2 This report has been prepared with input from both the Council’s external legal advisers Eversheds, and external financial advisers, Price Waterhouse Coopers.
The report provides an overview of the principal legal, financial and commercial issues underpinning the main project agreement (the Agreement) and refers to key supporting documentation. The Agreement and the supporting documentation are subject to ongoing negotiations. All are in a relatively advanced state, as befits an ambitious negotiation timetable which anticipates completion of the Agreement and supporting documentation on Friday 29 June.
Nevertheless, this report cannot be definitive and is therefore, an attempt to provide, in abbreviated form a comprehensible and representative summary of complex and protracted issues in a concise and comprehensive form.
2. Background
2.1 Members will recall that a report was approved by Cabinet on 11th April 2001 appointing Jarvis Projects Ltd. as the Preferred Bidder for the Sandhill View project under the Private Finance Initiative (PFI).
2.2 Since that time Council officers and external advisers have been conducting detailed negotiations with Jarvis and their advisers on the terms and conditions of the contract arrangement with the objective of reaching a satisfactory financial close by 29th June 2001. This date is a key date as it permits the mobilisation of the Jarvis construction team so that a start on site would be achieved by the 16 July 2001, with completion of the buildings by August 2002.
3. Project Development
3.1 Meetings have been held with Jarvis and all the User Groups in order to ‘fine tune’ the building plans, furniture layouts, etc. The only major changes to the Jarvis bid plan proposals that has arisen is a request by the school to provide a 25m swimming pool (20m pool included in the bid). The pool will be available for use by both the School and the community. This has resulted in an increase of £200k to the capital cost together with limited increases in Life Cycle costs and Facilities Management services (FM services). It is proposed to meet the extra capital cost by way of a ‘bullet’ payment at Practical Completion. Potentially this could be funded from the Neighbourhood Renewal Fund allocation for 2002/03. The uplift cost for Life Cycle and FM services reflected in the Unitary Charge is considered to be minimal.
3.2 Details of the ‘reserved’ matters, set out in the Outline Planning consents, covering both the Sandhill View and Broadway Centre sites have been submitted to the Environment Department and approval to the proposals is expected by 22 June. The approvals have taken into account the need to carry out consultations as part of the planning approval process.
3.3 A similar and parallel exercise to the design review has been carried out with regard to the level and detailed content of the soft facility management services to be provided by Jarvis during the 25 year concession period. The scope of the proposals cover the following services:
· Building maintenance (day to day as well as planned)
· Energy and utility services
· Security
· Cleaning
· Catering
· Furniture, fittings and equipment
· ICT
· Site and grounds maintenance
· Centre ‘help’ desk
· Management of the Sports hall/swimming pool facilities.
Specific FM meetings have been held with Jarvis and User Groups as well as representatives from City Contracting Services in order to clarify further and agree the level of service provision. Agreement ‘in principle’ will be attained at the Financial Close date with further agreement on details being reached during the construction phase. These are not anticipated to have any cost implications.
3.4 Jarvis have already committed time and expense in connection with the development of the pre-construction works. Discussions have been held with Building Control and the Fire Officer as well as the preparation of sub-contract packages for the various elements of the building structure and associated mechanical and electrical services. With Financial Close being
reached at the 29 June 2001, Jarvis will be in a good position to commence work on site on 16 July 2001 and achieve the completion of the new facilities by August 2002. Works will commence with the demolition of the Thorney Close Youth Centre and the establishment of site access. Certain parts of the sports grounds will not be completed until early 2003 as these can only be created following the demolition of the existing Sandhill View School. The school will be continue to operate during the construction period of the new buildings.
4. Legal Powers and Certification
4.1 Management Committee received a report on the Local Government (Contracts) Act 1997 at its meetings on 16th July 1997 and 21st January 1998. The Act was introduced to address concerns of the private sector about entering Public Private Partnership contracts with local authorities.
The Act:
- confirms local authority powers to enter into a wide range of contracts;
- empowers authorities to issue certificates for partnership contracts enforcing their enforceability; and
- provides for compensation to contractors if contracts are nevertheless rendered void by the courts.
4.2 The report to Management Committee on 16th January 1998 authorised the City Treasurer to sign certificates under Regulation 7 of the Local Authorities (Contracts) Regulations 1997 on behalf of the Council.
4.3 It cannot be ruled out that personal liability could attach to the Certifying Officer, although in the absence of dishonesty or bad faith or recklessness or even negligence, the risk must be considered small. Nevertheless, the fear of personal liability is a very real one for the officer concerned, who will therefore be concerned that he is protected by a valid indemnity from the Council.
5. Key Provisions of the Agreement
5.1 General
The Agreement has been drafted for the most part so as to be consistent with the Treasury Taskforce Standardisation of PFI Contracts Documents, issued by the Treasury in July 1999. That document provides extensive guidance and some proposed commercial drafting for various provisions. However, the document falls well short of being a standard contract such as those issued by the JCT for building contracts or the ICE for engineering contracts. As a result, commercial negotiations have taken place upon the Agreement and ancillary documentation. The negotiations have proceeded swiftly and the originally planned completion date still appears attainable at the time of writing.
5.2 Agreement Structure
The Agreement is structured around the basic contractual framework of an initial phase during which construction works will take place, followed by a second works stage when the old school will be demolished and external hard and soft play areas will be completed. Thereafter, a full 25 year service phase will commence in which facilities management services will be provided to the new buildings together with life cycle maintenance.
The service phase commences, when the buildings and other facilities become available for use. Further works e.g. landscaping and demolition may continue during the service phase until all works are completed. In contractual terms it is necessary to appreciate that there is no direct building contract between the Council and the Contractor. In the Agreement, the contractual obligations of the Contractor are to simply provide the works in accordance with the scheduled designs and accommodation requirements. The Contractor, as is usual in PFI projects then sub-contracts its building and service obligations to Sub-Contractors. Construction risk is passed to the Contractor. The Council does not pay for such works directly but does so by paying for services through a Unitary Payment (unitary because it relates to elements of both capital and service cost repayment) throughout the remaining life of the contract.
In addition to the Agreement there are a number of ancillary documents making up the totality of the legal arrangements between the parties and incorporating the interests of other parties such as the Funders (NIB and Barclays Equity Investment) and the Governing Body of Sandhill View School.
5.3 Payment and Performance
The Payment Mechanism within the Agreement is arguably the most important component of a PFI contract. It is the principal means by which performance of the services and the availability of the schools are monitored and incentivised through a system of deductions from payment of the Unitary Payment. The cornerstone of the mechanism is the concept of the availability of space to prescribed standards.
5.3.1 The Contractor will be expected to meet the service standards specified in the Output Specification for the duration of the 25 year operating concession.
The Contractor will be remunerated on the basis of a single charge to cover all services (the “Unitary Payment”), which will be payable on a monthly basis. The Unitary Payment will become payable in full only when the Centre is fully operable. An element of the Unitary Payment will be index-linked over the duration of the operating concession using an agreed formula in recognition that some of the Contractor’s operating costs will increase with inflation.
5.3.2 A Payment Mechanism has been developed in line with the following objectives:
· the Contractor is effectively incentivised to deliver the services specified in the Output Specification;
· the Council retains adequate protection in the event of under performance or consistent poor performance from the Contractor; and
· appropriate risk is transferred to the private sector to maximise Value for Money and to satisfy compliance with accounting requirements under FRS5 (off balance sheet treatment) and Capital Finance Regulations.
5.3.3 Monitoring of the Centre will be done by a Facilities Manager, employed by the Contractor, and by the Users, who will report any faults to a central Helpdesk, provided by the Contractor.
Deductions are to be made monthly, based on a deductions report prepared by the Contractor in respect of its performance. This reflects the fact that the Contractor is obliged to monitor its own performance. The Council may also monitor the Contractor’s performance through:
· general provisions in the Agreement that grant the Council the right to audit or inspect the Contractor’s performance; or
· the opportunity that the Council and the schools have to review the Contractor’s draft deductions report at the end of each month.
Any deductions that are not agreed may be referred to the Dispute Resolution Procedure (“DRP”).
5.3.4 In order to achieve the above objectives, financial deductions will be made to the Unitary Payment when the Contractor fails to deliver the services in the agreed manner. Such deductions are determined by multiplying a common unit of deduction (the Area Rate) with the pre-agreed weighting factor for affected individual rooms and areas.
Further details are provided below:
Deductions for Unavailability
In principle, where a room or area is in breach of specified Availability Criteria, as detailed in the Output Specification (and is therefore deemed to be unusable), then the deduction levied is equal to 100% of the Unitary Payment which is applicable to that room or area for the duration of the Unavailability.
In circumstances where a room or area is in breach of the Availability Criteria (i.e. is technically Unavailable) but is nevertheless used (eg. where the temperature drops below a given threshold specified in the Availability Criteria but the room is still used) then the deduction levied is equal to 50% of the Unitary Payment which is applicable to that room or area for the duration
of the Unavailability. This recognises that some rooms are likely to be used wherever possible (eg. teaching areas in the school).
It is important to give the Contractor an opportunity to mitigate its losses and incentivise it to provide additional facilities when rooms or areas become Unavailable, and to this extent, where the Contractor provides Alternative Facilities to an Unavailable room or area, such Alternative Facilities being acceptable to the user, then no deduction is applicable (on the basis that the user has not suffered a loss as a consequence of the Unavailability).
Deductions for Shortfalls in Services
In principle, where a room or area is in breach of a specified Performance Standard (ie. it is subject to a “Service Performance Shortfall”) then the deduction levied is in general equal to 30% of the Unitary Payment which is applicable to that room or area for the duration of the Service Performance Shortfall. The financial deduction is less than a deduction where a room or area is Unavailable because the room or area will not be rendered ‘unusable’ because of the Service Performance Shortfall. The 30% figure represents the approximate percentage of the Unitary Payment which is applied to the provision of services (with approximately 70% of the Unitary Payment utilised in the repayment of finance drawn to fund the initial capital costs).
More than one Service Performance Shortfall can occur in any one room or area at any one time and each Service Performance Shortfall shall generate a separate deduction, subject to the proviso that deductions cannot exceed greater than 100% the of the Unitary Payment which is applicable to that room or area for the duration of the Service Performance Shortfall.
The Payment Mechanism also accounts for those Performance Standards that are not area based (eg. health & safety and compliance issues) and generates financial deductions should the Contractor fail to meet these Performance Standards.
Ratchet Mechanisms and Other Deductions
Although the above deduction regimes satisfy the above objectives to a large degree, there is a need for additional deduction mechanisms to ensure that the Contractor is fully incentivised to perform in line with the requirements of the Output Specification. Such mechanism effectively ‘leverage’ the deductions described above to generate greater financial deductions for more serious Contractor failures, hence providing a greater incentive for the Contractor to avoid such failures.