Communities and Local Government

PFI procurement is a negotiated process. It normally takes between 18 and 24 months from advertisement to contract award. Typical PFI procurements will go through the following processes:

The above may vary from procurement to procurement, for instance the FRA may issue selected bidders with an Invitation to Submit Outline Proposals (ISOP) before issuing an ITN. This enables the authority to gain an insight into what the bidders might offer. Again, it may be felt to be unnecessary to ask the preferred bidder to provide a Best and Final Offer (BAFO) as nothing much has changed from the ITN bid submission.

The contract document - known as the Project Agreement - will consist of three main parts; the output specification, the payment mechanism and the contract terms.

The Output Specification - This sets out what is expected of the SPV. It is written in terms of outputs or outcomes. This means specifying what the authority expect to see as the result of this project rather than how it expects that result to be achieved. This allows the PSP to bring innovative ways of thinking and working into the project.

Payment Mechanism- This has two main elements to it: Availability Standards and Performance Standards.

Availability Standards - these define when the asset is considered 'available for use'.

Performance Standards - these relate to any standards not covered by the Availability Standards, in general the service and maintenance standards.

Contract terms - This contains the legal framework for the contract drawn up between the SPV and the FRA. HM Treasury issue guidance and model contract conditions which must be adhered to in drafting PFI contracts.

ODPM will issue criteria when bids are invited to go on the FRS PFI programme. In addition all local authority projects are reviewed by the Project Review Group (PRG) at the OBC stage. The PRG also have criteria which need to be met based around bankability, affordability and risk allocation. ODPM will compare different bids from various Fire Authorities against the criteria, some of which will be linked to the modernisation of the Fire and Rescue Service. In addition ODPM will need to take account of the number of PFI credits available to support schemes.

The FRA will pay a yearly 'unitary charge' to the SPV. The charge will be based on the availability and performance of the facilities and associated services, and deductions will be made for non-availability or poor performance.

• Availability relates mainly to the physical condition of the assets. Availability standards are defined at the beginning of the PFI process. An example of this could be that the building 'should be watertight at all times'. This might mean that a fire station with a leaking roof did not meet the availability standard and was therefore 'unavailable'. If the asset or assets do not meet these standards then the SPV forfeits an element of the Unitary Charge relating to the asset or assets until the standards are met.
• Performance relates to how well the SPV carries out the services it is responsible for. A performance standard could be, '98% of requests for emergency repairs to equipment must be answered in 12 hours to receive full payment'. If the SPV only answers 96% of the emergency requests within 12 hours during a given time period then a certain percentage of its payment for that month would be deducted. There is usually a mechanism to increase the penalties if the standards continue to be below the requirement.

The payment mechanism will be structured to ensure value for money by reflecting the allocation of risks, and will be based on agreed standards and deductions.

All projects involve risk. It is the allocation of risks to the party best able to manage them, which allows innovative solutions in PFI deals and helps deliver value for money.

The PSP will be asked to be responsible for those risks that they are best placed to manage. They will not, for example, be asked to decide how many fire stations are needed - this is a decision for the FRA, but they will be responsible for ensuring that the agreed number are available to the required condition when needed.
 
At an early stage in the procurement the SPV will be provided with an indication of the likely risks and asked to confirm their willingness to accept significant risk transfer. Negotiations will normally focus on whether the proposed allocation of risks produces the best value.

The Fire Authority and the SPV will both need to monitor the level of service performance. Exactly who does what needs to be made completely clear from the outset and laid down in the contract details, including how any disputes should be dealt with.

It all depends on the particular circumstances but the options will be contained in the contract. The FRA might have the right to acquire the building at a specified value or to walk away if it has no further need for it.

Alternatively there might be provision to re-tender the service with the building being made available to the successful bidder. Whether the SPV get paid for the asset will depend on the approach to residual value and whether this is reflected in the charges. But the contract will ensure that the asset is maintained to the required standard and is capable of continued use if required.

Questions about the use of PFI in the Fire and Rescue Services should be directed to:

David Green & Kate Hepher who are responsible for PFI projects for the Fire and Rescue Authorities at ODPM.

Fire Service Improvement Team
Office of the Deputy Prime Minister
17B Portland House
Stag Place
Victoria, London
SW1 E5LP
Tel: 0207 944 4523

The Private Finance Unit at HM Treasury is responsible for Government policy on PFI/PPP and can supply information on the subject. Contact details are: