PPP contracts: Best practice

On 13 June the government launched a new best practice code for the public and private sector aimed at identifying ways to make savings in existing contracts for schools, hospitals and other public infrastructure projects using public private partnership contracts (PPP). The code applies to all PPP arrangements such as the private finance initiative (PFI), PF2 and other variants of PPP contracts.

The code sets out commitments from both public and private sector parties on constructive engagement, flexibility and improving operational efficiency. The idea is that these commitments will support what is intended to be an overall improvement in contract management and the creation of a more effective working environment between customers and suppliers.

The code arises out of a study by HM Treasury entitled Making Savings in Operational PFI Contracts, published in July 2011. The Treasury report identifies areas where the public sector can carry out contract saving reviews and savings opportunities can be identified and acted upon. In practice, as the code makes clear, the private sector needs to look at ways in which it can improve the value of the service it is offering. The requirement to “reasonably interpret” existing rights or obligations so as to facilitate the public sector’s understanding of efficiency and savings opportunities contained in point 8 of the code suggests a proactive approach to operating the PPP agreements in the public sector’s best interests.

The commitments are sufficiently generalised to suggest that they impose very little on either side that would lead to any real change in behaviour

The public and private sector parties to the contract each agree to observe eight commitments, as set out in the code. These commitments largely mirror each other so that, for example, both parties agree to provide a single local point of contact for each project, and both agree to engage constructively and in a timely manner with each other. Often, however, the private sector’s commitments are more extensive: identifying options for operational improvements on the private sector side requires the private sector to promote, suggest or incorporate measures to deliver cost savings, added value and operational flexibility as well as optimising asset management, whereas the public sector’s commitment is far less detailed. This reflects the fact that the private sector is expected to search proactively for cost savings and operational efficiencies. To some degree this all seems to be common sense rather than anything particularly new, a bit disappointing given that it has taken two years for the code, which runs to three sides of A4 paper, to appear.

The code is voluntary and is not intended to be legally binding. Added to that, the commitments entered into by the parties are high level and sufficiently generalised to suggest that they impose very little on either side that would lead to any real change in behaviour. In these circumstances, should you bother with the code? I would suggest that you should: details of those companies that have signed up to the code are published on the Treasury website and updated every two weeks (www.gov.uk/government/publications/code-of-conduct-for-operational-pfippp-contracts). The current list includes, as you would expect, many government departments, a number of financial institutions and many major contractors. Given the competitive tendering environment for public sector work, fuelled by the government’s investment in infrastructure, how long will it be before this “voluntary” code becomes as good as mandatory if you want to stand a chance of getting on to a tender list? The government announcement launching the code notes that “widespread support from the market and public sector is expected”. That seems very likely.

Once you have signed up, to what extent will you then be judged by a different standard of behaviour? This reminds me of the era of the non-binding partnering contract. As is well known from the decision in Birse Construction Limited vs St David Limited [1999] EWHC Technology 253, while non-binding partnering agreements do not have contractual force, they can assist in judging the standards of behaviour to which the parties have agreed. Consequently, breach of the code could not give rise to a contractual entitlement for the innocent party, but it may affect the relationship between the parties in what will usually be a long-term partnership and the existence of the code may have a bearing on any disputes that arise in relation to the project agreement itself. There is also the adverse market reaction to consider should any such disputes become public. This may become an example of a commercial relationship where adherence to a voluntary code is as significant as definable legal rights.

Simon Lewis is a partner in the construction and engineering team at Bond Dickinson