PFI: What it means to HR

With
more than 500 Private Finance Initiatives (PFIs) already underway and many more
in the offing, the next few years are likely to prove challenging for HR
professionals on either side of the public/private fence.  Jane Lewis investigates

For
many, the immediate concern will be countering union charges. Despite the
protection afforded by Transfer of Undertakings (Protection of Employment)
transfers, or TUPE, public sector staff will be at the mercy of ‘privateers’,
with no sense of public service ethos. They will drive down wages and pensions
and threaten working conditions, morale and quality of service.

There
is also the question of dealing with a hybrid workforce, comprised of ex-public
service workers on TUPE contracts, and staff recruited by the PFI contractor.
Although the Government says it is committed to tackling the problems of a
two-tier labour market, the burden of actually managing it will fall squarely
on HR.

Two
separate developments over the past 18 months have highlighted just how difficult
this may turn out to be. First, the increasingly uncertain financial condition
of some of the big PFI contractors, notably Amey. Its share price tumbled by 90
per cent in 12 months, and – in yet another interesting transition for staff –
it recently sold off its complete portfolio of PFI investments to John Laing.

Second,
there were the special concessions granted to NHS workers in the Retention of
Employment Model (REM) agreed in July 2001. Slammed by the Business Services
Association as “a political fix to buy off trade union opposition”, REM
essentially means that operational staff will continue to be employed by the
NHS and merely seconded to the PFI provider for the duration of the contract.
Administrative staff, meanwhile, will be transferred under TUPE as usual.

Critics
who claim REM simply replaces one two-tier system with another, argue this is
certain to prove a can of worms in terms of employee relations and employment
law, and is bound to create a split between operatives and supervisors. It could
also severely restrict an employers’ ability to introduce innovation and new
skills, and affect an individual’s chances of advancement.

Indeed,
the chance to shine in a new environment is one of the main rallying points of
the pro-PFI lobby, which claims the transition to the private sector will open
up a range of new opportunities to public sector workers currently languishing
in dead-end jobs. Arguably, this is nowhere more applicable than in the HR
department itself.

One
local authority HR director, who declined to be interviewed, now combines his
council HR duties with an exciting new role on the PFI provider’s management
team. From public dogsbody to sizzling entrepreneur in little more than 18
months – not bad going by anyone’s standards. Plans are now afoot to market the
HR services they are pioneering to other customers.

Here
we take a closer look at how three more public/private initiatives have fared.

Case
study: Liverpool Direct

When
Liverpool City Council chose BT to help transform its poorly performing key
services in June 2000, the obvious vehicle was a joint-venture company,
christened Liverpool Direct.

The
key criteria of the new partnership, says chief executive David McElhinney, was
that it would bring cohesion to nine separate departments – including HR,
revenue collection and benefits payments – which had all previously operated in
virtual isolation from each other. “There was a lack of leadership and a lack
of direction. We didn’t want an outsourcing model; we wanted to bring things
together.”

A
further bonus of creating an independent company in which the city of Liverpool
holds a percentage of the shares, was that it enabled the new partnership to
exploit its intellectual capital by going out to tender for deals elsewhere.

In
all, some 850 council staff made the transfer. McElhinney says the council made
a point of ensuring that staff were seconded, 
not transferred under TUPE, which meant they had the right to return to
council employment if they wanted. He claims just two employees have requested
to return.

Striking
improvements

Some
of the new company’s most striking improvements are in its HR provision. Under
the terms of the deal, BT put £54m up front for capital investment – and much
of this has been spent on updating systems, creating a self-service HR intranet
and installing a 24/7 call-centre for use by both the public and staff.

According
to McElhinney, Liverpool’s HR service now boasts the highest quality intranet
in the public sector. Costs in the HR department have also been reduced
dramatically from £4.5m a year, to £2m today. New technology has also meant a
major headcount reduction in the HR department, which has virtually halved from
206 to 105. McElhinney’s target is to get it down to 90. Redundancies, he says,
have all been voluntary.

“Obviously
it was a very difficult time,” he says. But being “open and transparent” with
the unions helped greatly. And one reason BT was chosen as a partner, he
claims, was because its culture also reflected these qualities. “As well as our
contractual targets, we have aspirational targets, which are always set higher
and have proved to be fantastic drivers,” McElhinney says.

Total
transformation

The
transformation of Liverpool’s once ailing public services speaks for itself.
Debt collection and tax receipts – once at some of the worst levels in the
country – have improved immeasurably. As for HR: “We are now in the upper
quartile [of all authorities] measured in terms of key performance indicators,”
he says. “We used to be right at the bottom.” Indeed, Liverpool’s HR team has
just been short-listed as HR Team of the Year by the Local Government
Chronicle.

“It’s
been a difficult journey,” says McElhinney. “We didn’t bring in consultants –
it was our people who re-invented themselves and turned, what was described as
a failing organisation, completely around.”

Case
study: The Metropolitan Police

The
residents of Deptford, South East London, may be in for quite a shock if they
walk into their local police station this month. Instead of the usual desk
sergeant, they will be confronted with a smiling customer services
representative.

The
reps are from Equion, a wholly-owned subsidiary of John Laing – the company
formerly better known for its construction projects and house-building, which
now claims to be one of the UK’s leading PFI and PPP service providers.

Equion
seems to have hit upon a very successful niche in the police market. Hot on the
heels of the £120m deal signed with the Metropolitan Police in October 2001 to
provide support services for four police stations (including Deptford), comes
news of an even more far-reaching 
scheme – a 25-year deal to build and operate 16 new police stations, and
a new traffic headquarters in Greater Manchester.

“I
am sure there will be cultural changes, but that doesn’t mean cultural
difficulties,” says Equion managing director, Richard Weston. This is partly
because many of the roles that Equion staff will be taking on for the
Metropolitan Police – such as manning reception areas, handling administration
in custody suites and running property store-rooms – have already been
“part-civilianised”.

In
all, Weston reckons that some 50 police station staff will be transferred to Equion,
and the company plans an additional recruitment drive to fill positions vacated
by police officers.  This can only be a
good thing, he says. Officers will be freed up to do the special police work
“they’ve been trained at tremendous cost to do”,  rather than wasting their time on routine administrative work.

Greater
flexibility

He
anticipates the change will also prove popular with civilian workers as it will
mean less-rigid shift patterns and greater job-sharing, which will open up
opportunities to a much wider group. Greater flexibility also make it easier to
allocate staff for peak times, such as Friday and Saturday nights.

Training
has been intense – focusing on law, people’s rights and how to deal with those
in distress. “We found the training the Met had been giving staff was less than
comprehensive,” he says. One reason being that staff were usually closely
supervised by police officers, and so never had to stand on their own feet. But
Weston claims the Met has been so impressed with Equion’s courses, it may
consider hiring the company to train its own officers.

Weston
claims that opposition to the scheme has been minimal, and tends to be of a
more political than practical nature. Too many people, he believes, are
“cynical and uninformed” about PFI projects. Presenting its employee plan to
staff during the bidding process helped to create staff “buy-in”. It also
communicated extensively with the PCS and Amicus unions involved.

He
rejects the idea that the deal will create a two-tier workforce. “That implies
a huge difference in terms and conditions which isn’t the case. Obviously the
people we recruit won’t be on identical terms and conditions, but over time, we
would hope they’ll see the advantages of changing.”

The
best thing the company has to offer, he claims, is opportunity. “Currently, if
you’re a civilian jailer or receptionist, there is no career [trajectory]. But
once in the private sector, you’ve immediately got an opportunity to progress.”
In theory, he adds, a public sector recruit could end up running the company.
But for most, even “a change of rut” will be a welcome breath of fresh
air. 

Case
study: Haringey Borough Council

Many
of the country’s most pioneering and innovative private/public arrangements
have been struck against the odds – often in response to apparently insoluble
problems in the public sector. Haringey Borough Council’s Education Department.

It
now comprises of a strategic partnership between the council and Capita, is no
exception. As Gary Peile, deputy director of education, points out, Capita was
summoned following a “very difficult Ofsted report”. To put it bluntly, the
borough’s schools were failing badly.

The
nature of the deal was that Capita would provide the department with strategic
management. While it operates most of the senior posts, existing council staff
have continued in their roles further down the pecking order.

Peile
admits this created a ‘them and us’ scenario for a few weeks. But once everyone
realised how committed the new management was to positive change, this soon
disappeared. Head teachers in particular, he says “are very, very positive”
about the new arrangements.

Indeed,
the success of the strategic partnership has helped boost acceptance for
further private initiatives – notably a £95 million 30-year PFI contract with
Jarvis for the refurbishment and operation of eight of the borough’s schools.

Changing
attitudes

Handing
the maintenance and running of their school buildings over to a for-profit
organisation caused many governors serious concern. According to the council
for Haringey’s school and college governing bodies, many were initially
“vehemently opposed to the scheme”. But, says Peile, it is amazing how attitudes
change once solid evidence of improvements becomes apparent – especially in the
shape of new facilities.

The
implications for personnel were very slight, he says, involving about a dozen
caretaking staff. However, the partnership has had to contend with opposition
from Unison, “and they are very anti this type of deal.”

Success

The
Haringey PFI was considered such a flagship scheme that senior officials from
the Treasury and Education Department were seconded to the borough to cut their
teeth on PFI. But the most striking thing of all, says Peile, has been the
attitude of Jarvis. The company had to learn as it went along, he says – and
won the hearts and minds of the borough in the process.

With
a 30-year partnership in the balance, there was no way that Jarvis was going to
come in to smash and grab. “It knew it had to get these schools on board – and
it has succeeded in doing so,” Peile says. And the future looks much rosier for
Haringey’s school children as a result.

PFI
and PPP – a brief history

For
many, the intricate details of the Private Finance Initiative (PFI) and Public
Private Partnerships (PPPs) remain a mystery – and most are probably happy to
keep it that way. As Tony Blair told the Labour Party conference last October,
most people “don’t care” who builds and services public projects, “so long as
they’re on cost, on budget and helping deliver a better a better NHS and
schools”. From his point of view, it’s an attitude worth fostering: a good slab
of public indifference is surely the best means of countering the near
unanimous – and increasingly vocal – opposition to PFI from the unions.

Private
sector involvement in public services is nothing new. PFI and PPP both follow
hot on the heels of the 1998 Best Value Initiative, which itself was
essentially a continuation of the Compulsory Competitive Tendering policy
pioneered by the Thatcher government in the 1980s. However, there are some
major differences.

PFI

PFI
contracts are much longer, lasting on average between 20 and 30 years, compared
to around five years for most Best Value contracts. Also, although the terms
PFI and PPP are often used interchangeably, they refer to subtly different
policies. PFI deals involve the provision of an asset – and possibly a
full-service package – under a long-term contract.  PPPs, on the other hand, are fully-fledged public/private
integrations, often involving the creation of an entirely new company whose
assets will never return to government. Examples include the National Air
Traffic System, and the London Underground Consortium.

But
what really distinguishes current projects is the sheer scale of the undertaking.
With more than 500 PFI schemes already running nationwide, there’s no sign of
the trend slowing down. Last July, the Chancellor Gordon Brown promised an
extra £61bn for health, education and transport – all prime territory for
leading contractors such as Amec, Capita, Serco, Jarvis, John Laing, WS Atkins
and Balfour Beatty.

Buy
now, pay tomorrow

The
main opposition to PFI – apart from the politically-inspired charge of
‘creeping privatisation’ – centres on funding and performance. Traditionally,
the Government has paid up front for capital projects, using tax revenues or
borrowed money. Under PFI, the onus of raising that cash falls to the private
company chosen to build and run the project. The only expenditure the Treasury
registers is the annual contractual payments it makes to the contractors. For
both government and tax-payers, PFI can be seen as a straightforward case where
the benefits are gained now.

The
main question raised by critics is: at what price tomorrow? According to the
Tory peer, Lord Saatchi, PFI schemes are essentially Enron-style
“off-balance-sheet vehicles used to hide debts”. And, while the scheme’s
champions claim they can cite a whole of host of projects (from the Severn
Bridge to countless new hospitals) built on time and to budget, others question
the costs involved. A recent survey by the Association of Chartered Certified
Accountants found that more than half of respondents did not think PFI was
providing value for money.

One
reason is that lenders view contracting companies as inherently riskier bets
than government – and tend to increase interest rates accordingly. The
Institute for Public Policy Research reckons that higher borrowing costs alone
could increase the overall capital cost of a PFI project by 10 per cent over a
25-year period. Opponents argue that when that happens, the first area to be
hit will be operating budgets. Certainly at a local level, several NHS trusts
claim that the increased cost of servicing debts is creating “major
affordability problems”.

Then,
there is the question of risk. Officially, if a project goes over-budget or
implodes in some way, the PFI contractor is liable. Similarly, if service
contractors under-perform, they will be penalised by losing part or all of
their annual government payment. But critics argue that we have already seen
what tends to happen in practice: no government is likely to stand by and let a
critical public project self-destruct, however inept the management – you only
have to look at the nuclear industry or the railways to see that.

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