Peter Long comments on the effect of recent legislation
As many readers will know, the provisions of the Local Government Act 1999 relating to “Best Value” came into force on 1st April 2000. They are likely to have an important effect upon PFI contracts entered into by local authorities. In this article we describe the main areas where its presence will be felt.
What is “best value”?
The Act imposes upon a local authority a duty to “make arrangements to secure continuous improvement in the way in which its functions are exercised, having regard to economy, efficiency and effectiveness”.
Under the Act, the Secretary of State has the power to make orders specifying “performance indicators” by reference to which a local authority’s performance in exercising its functions must be measured. The performance indicators for the year 2000/2001 include, for example in relation to roads:
- the condition of the principal roads defined by reference to their residual life derived from deflectograph surveys;
- the number of days of temporary traffic controls or road closures on traffic sensitive roads caused by local authority road works.
How does a local authority secure Best Value?
The two key statutory requirements placed upon local authorities for the purpose of securing “continuous improvement” are the Best Value Review and the Best Value Performance Plan.
Best Value reviews
Local authorities are obliged to carry out Best Value reviews of their functions every five years. The purpose of a review is for a local authority to improve the way in which its functions are exercised “having regard to a combination of economy, efficiency and effectiveness”.
In carrying out these reviews, a local authority is required to:
- challenge why, how and by whom a service is being provided;
- secure comparison with the performance of others across a range of relevant indicators;
- consult local tax payers, service users and the wider business community in setting new performance targets;
- use fair and open competition wherever practicable as a means of securing efficient and effective services.
The reviews should be the principal means by which authorities consider new approaches to service delivery and set challenging but realistic performance targets which will deliver continuous improvements.
As from the financial year 2000/2001 local authorities are expected to set targets for the performance indicators published by the Secretary of State. Most of these targets will be set by consulting with the rate payers, service users and other stakeholders and by comparing the authority’s current and prospective performance against that of other public sector bodies, and those in the private and voluntary sectors. For some indicators, however, local authorities are required to set quality targets that are, as a minimum, consistent with the performance of the top 25% of all authorities. Targets must be consistent with the overall target of 2% pa efficiency improvement set for local government spending as a whole.
Best Value reviews must set action plans to deliver the targets to a realistic timetable and authorities must put in place monitoring and scrutiny arrangements to provide a regular check on performance.
Best value performance plans
Local authorities are required to prepare a best value performance plan for each financial year, in accordance with orders and guidance issued by the Secretary of State.
Performance plans should include:
- a summary of current performance by reference to performance indicators;
- a comparison of current performance with performance in previous financial years;
- the authority’s proposals for delivery of better performance and the level of efficiency which the authority expects to achieve;
- a report on the outcome of completed Reviews, including action plans to achieve new targets;
- performance targets for both local and national indicators for future years, usually by rolling forward existing ones, but also including new targets set following reviews;
- a plan of action to achieve new targets.
Impact of Best Value on PFI contracts
Best Value presents particular challenges in regard
to long term contracts. The DETR Guidance on Best Value says:
“The fact that a service is currently provided internally or externally following a competitive process is not in itself sufficient to demonstrate best value, particularly where the contract is of a long duration and has been in operation for several years. Authorities need to consider whether the service meets current and future needs, rather than those assumed at the time the original choice was made. Contracts with the private sector should be examined to see if they permit, and provide incentives for, innovation and continuous improvement. Where this is not the case, authorities need to discuss with providers how best to accommodate these improvements, taking into account the scope for agreeing or negotiating new contract arrangements, and their willingness to finance service improvements and share any risks and rewards.”
Most PFI contracts define the service required from the private sector contractor by reference to an output specification. Payment is dependent upon the availability of the service and upon the standard or level of the service actually achieved, measured by reference to agreed performance indicators which are monitored regularly. The Contractor has an incentive to perform the service to the output specification standards as measured by the agreed performance indicators. The Contractor also has an incentive to introduce measures which will increase efficiency in delivering the service, thereby reducing its costs. In some cases, the local authority may be able to receive some of the benefit of such savings under the change mechanisms in the contract or as a result of a benchmarking or market testing exercise (if the contract provides for it in relation to the service concerned) which produces a reduction in the unitary payment.
However, PFI contracts are some way from being the flexible tools which a local authority would require to enable it to secure continuous improvement, carry out Best Value reviews, produce Best Value performance plans and meet its other obligations under the Best Value regime. Local authorities are likely, therefore, to be looking very hard at a number of provisions in the PFI Contract.
Obligation to provide the service
Local authorities may wish the Contractor to accept an obligation to continuously improve the way in which it performs the service, not only in terms of cost, but also in terms of effectiveness and efficiency. This would include a requirement for the Contractor to carry out reviews of the service, and to produce annual performance plans.
The content of the reviews and the performance plans must enable the local authority to produce the reviews and performance plans required by Best Value legislation and guidance. Thus, the Contractor may be required to carry out a user satisfaction survey in relation to its services and to report the results to the local authority. The Contractor may also be expected to take part in a performance benchmarking exercise comparing the delivery of its own services with the delivery of similar services by other private sector companies in the same area or in the area of another local authority.
The result may be that targets will be set for improved performance in the annual performance plans which the local authority will expect the Contractor to meet. Responsibility for the cost of this will need to be addressed in the PFI Contract.
Benchmarking and market testing
The provisions for benchmarking and market testing will be directly relevant to this debate. The local authority will be under an obligation to ensure that it receives the benefit of cost savings resulting from changes in service delivery. One way to achieve this may be through the benchmarking and market testing procedures which most PFI contracts now contain. These mechanisms could also be used to capture increased costs to the Contractor in delivering improvements in service performance. The scope of the benchmarking/market testing procedures could be widened to encompass not only the cost of the services being provided but a broader best practice review of the services generally.
Change mechanisms
There may be instances where Best Value will not be capable of being addressed through the benchmarking/market testing process and, in such a case, the local authority will be obliged to use the change mechanism. Changes under that mechanism may not, however, represent best value for money and there may also be EU procurement issues for the local authority to consider.
Change in law
A change in the statutory instrument which set the national performance indicators will be a change in law. The change may be binding on the Contractor through a contractual obligation to provide Best Value as defined by statute. If it is, the question of whether it should entitle the Contractor to compensation will arise. If the change is not directly binding on the Contractor, it will nevertheless be binding on the local authority, who may be obliged to introduce it through the change mechanism.
The future
Best value has given local authorities an opportunity to approach procurement of services in a new way. Many of its concepts are found on PFI contracts already. However, new provisions will also be required and difficult discussions can be expected over the contract conditions through which Best Value is incorporated. The 4Ps have recently produced a draft guidance on the standardisation of local authority PFI contracts for consultation. It includes a section on Best Value which looks at many of the issues raised and proposes solutions. Nevertheless, the complex concept of Best Value will inevitably take time to be accommodated and bedded down into PFI contracts. The idea of the “standard form” remains as elusive as ever.
For further information on this topic, please contact Peter Long at peter.long@cms-cmck.com or on +44 (0)20 7367 3000.
