The government spends millions of pounds of public money on providing services to meet the needs of the public each year. Public sector markets involve spending by national and local governments across a range of services such as defence, education, public order, housing and health care.
The priorities of each government are affected by the political climate of the time and influence the buying process. In recent years, greater emphasis upon ‘accountability’ and ‘value for money’ has led to the Private Finance Initiative (PFI), launched in 1992. PFI allows the public sector to benefit from services, while placing the risks of buying and maintaining an asset in the private sector. Typical examples are prison services, road and rail links, schools, hospitals and waste disposal services.
One organisation that has been involved with a number of PFIs in the security industry is Securicor. This case study focuses upon Securicor’s strategy for developing PFIs that enable it to provide high value services in return for developing long-term revenue streams for its business.
In a PFI project, a government body enters into a contract (agreement) with a private company. The private company buys, builds and services an asset. The government department or local authority pays for the use of that asset for the duration of the contract. At the end of the contract period, the asset becomes publicly owned. PFI therefore:
- reduces the amount a government has to borrow in order to finance capital projects
- means that the government purchases services instead of providing services
- brings private sector skills into the domain of the public sector.
The Government first announced design, build, manage and finance PFI projects for prisons in 1993. One of the attractive elements was the prospect of a 25 year contract with a secure income from the public sector. From the outset it was important for Securicor to be involved with the development of the PFI concept. In order to do so, it investigated best-practice in prison design and operation by looking at prisons within the UK, Holland and the USA.
Securicor led a consortium of companies, each with its own expertise, to tender for HMP Parc. For example, specialist prison designers from the USA were called in to assist in the design of the prison. The bid included elements that would bring innovation to prison design and operation such as IT systems that would integrate security, control, prisoner management and management reporting systems for the first time in the UK. After successful selection by the government, The Consortium created a special company called Bridgend Custodial Services to protect the interests of the consortium members over 25 years and manage the investment. The consortium comprised:
- WS Atkins
- Seifert Architects
Financial support for the investment came from NatWest Bank as the lead arranger and other lenders such as Lloyds, Credit Agricole and the Bank of Scotland supported this. Work on the site began in December 1995, and in November 1997 the prison received its first prisoners.
Risk occurs where the future outcomes of current actions are unknown. Planning highlights the risks associated with a project. It is important to ensure that the expected financial return adequately compensates for the risks involved, though this can be difficult with a long-term investment like a prison. The likelihood of such risks materialising can be estimated, based upon knowledge of both past and current events. One of the problems of these early PFIs was that there was little past or current evidence as these types of projects had not been undertaken before within the UK.
There were many issues to be considered. For example, originally the government wanted to transfer occupancy risk within a PFI prison to the private sector. This meant that income would vary according to the number of prisoners rather than places available within prisons. As it would never be possible for a private contractor to control the number of prisoners admitted to prisons, banks would not lend on this basis and the government had to amend its requirements and pay for availability of prisoner places. This provided a better balance of risks between the private and public sector.
Over the 25 year period even availability presents challenges. To guarantee that 800 places would always be available, routine maintenance needed to be planned to ensure flexibility in managing the prison population. One of the primary risks facing the consortium was opening the prison on time. The prison opened one month ahead of schedule in November 1997.
Had it not opened on time, the consortium would have had to pay the government approximately £50,000 per day to compensate for the lack of available prison places and cover the cost of alternative prisoner accommodation.
Another risk was that the reputation of members of the consortium and banks could be affected if the project failed or was associated with bad publicity. Securicor is a household name. Any damage to its reputation could affect other parts of the business such as the Cash and Guarding services. It was important, therefore, to assess the possibility of incidents occurring within the prison, consider how these could affect the reputation of Securicor and develop appropriate contingency plans.
Since the PFI contract for HMP Parc was one of the first two in the sector and neither party had experience of this sort of project, there were lengthy contract negotiations. There were some strict clauses within the contract. For example, it could be terminated without notice if any contractor offered a corrupt gift to any government official whether either was involved with the project or not.
The contract also required Securicor to perform to high and measurable standards throughout the length of the contract, with the Home Office appointing a team of controllers at the prison. They are responsible for measuring performance against contract as well as for making decisions about disciplinary action against prisoners.
The interpretation of some contract clauses was also problematic since several of them became subject to different interpretations by Securicor and the government and required subsequent clarification.
A steep learning curve
The benefit to an operating company in entering PFI contracts is that, provided performance standards are maintained, income is guaranteed over 25 years and returns from such contracts are from a reliable and stable source – the government. They can also be higher than those traditionally earned in some service operations. The PFI project at HMP Parc was invaluable in providing Securicor with the experience necessary to approach not just criminal justice contracts but also those that combine specialist security with other integrated support services. Securicor selects possible PFI contracts against the following criteria:
- the project fits within the broad strategy of the company
- the project is attractive, providing a good balance of integrated services and that the risk/reward ratio is favourable
- the project fits with the Securicor brand, other businesses and competencies of the organisation.
Bidding for a PFI can be an expensive exercise, often costing between one hundred and two hundred thousand pounds. When investing this money it is crucial to identify whether the company stands a good chance of winning the bid. There is little point in being good at bidding and poor at winning! The critical element is in selecting projects matched against specific criteria, such as:
- favourable margin
- high level of service vs. construction
- long contracts
- new market potential
- political sensitivity
- low risk to reputation.
Competencies at Securicor
The expertise and experience within the Securicor organisation is reflected in the selection and management of new projects. This indicates differentiation between Securicor’s product and its competitors’. Securicor also demonstrates an understanding of the requirements for many of its partners with whom it has worked before. Within the UK, a better understanding of the market has developed, resulting in model contracts and an improvement in the time between bid and operations.
Change over 25 years
Over 25 years many things can happen, so it is essential when entering into a PFI project to identify the likelihood of change and its effect upon the contract. For example:
- the type and nature of service provided on day one of the contract is likely to be quite
- different to the service provided at the end of the 25 year period
- changes in government policy, such as positive regimes for prisoners, may effect how the
- prison operates
- the financing of the loan may have to be reviewed periodically according to changes in the
- levels of risk or interest rates
- probabilities of significant economic impacts over the years
- technological change may affect the contract
- changes in shareholding may affect investment strategies
- the consortium may change the operator if the operator is not performing.
PFI contracts are attractive for large organisations such as Securicor because they provide long-term contracts with guaranteed payments by the government. Despite the many benefits, it is essential that organisations take into account the many risks involved, particularly those such as changes in government policy that they might find it difficult to manage or foresee.
Securicor | Securicor and the private finance initiative