PFI and PPP procurement guidance packs issued

With the government setting ambitious targets for increasing participation in sport and physical activity and making bold statements about the sustainable sporting legacy of the 2012 Olympic Games, local authorities are recognising the urgent need to challenge existing approaches to the delivery of leisure services, say Ben Sheppard and Damien Hargreaves

The end of 2007 saw the launch by 4Ps (Public Private Partnerships Programme) of a number of new or updated sector specific procurement packs. The new Sports and Leisure Procurement Pack, sponsored by the Department of Culture, Media and Sport (DCMS) had been awaited for some time. Included in the pack is a standard contract with accompanying schedules, model payment mechanism, output specification and a portfolio of procurement documents with accompanying guidance.

The pack is designed to provide the tools necessary for a local authority to procure new sports and leisure facilities through a PFI or PPP route and reflects emerging good practices from a number of schemes currently in operation or at the procurement stage. The standard drafting issued with the pack is compliant with the government's Standardisation of PFI Contracts guidance (SoPC4) and includes sections that are tailored to the sports and leisure sector as well as standard drafting that has been developed in other sectors such as the Building Schools for the Future programme.

Participants in the leisure sector, both authority clients and private sector funders and providers, will be keen to see the extent to which the pack adequately addresses issues raised by the typical features of leisure projects that give them a different risk profile to other accommodation sectors in PFI, such as third party income (or demand) risk and private sector occupation of the facilities. Such factors may justify taking a different approach in the contract, compared to other accommodation sectors, to issues such as security, permitted uses for the facilities, prescriptive maintenance obligations and vandalism risk. For example, is it appropriate to use prescriptive drafting for lifecycle replacement and programmed maintenance where the operator is taking substantial income risk? Indeed, it will be interesting to see whether the apparent use, in places, of established drafting from the schools sector will prove successful in leisure projects.

The pack contains sector-specific drafting in an attempt to deal with the treatment of income from users of the sports and leisure facilities and other third parties. It takes the view that essentially the operator is seen as best placed to manage the risk, but recognises that it is not realistic to expect the operator or the funder to be able to bear the risk in full over the life of the project. There is therefore an income benchmarking schedule under which the unitary charge may be adjusted according to how the operator's actual income and costs compare to the base modelled income and costs. This is intended to address issues such as falling demand due to the opening of competing facilities nearby, as well the unpredictability of demand over the medium to long term. The schedule is complex, involving detailed analysis and application of the make up of the financial model and will require careful review and detailed advice on each project as a crucial commercial element of the deal, particularly as the market has to date been reluctant to accept the degree of income risk sought by the public sector.

Another leisure issue that is often subject to extensive negotiation is the issue of vandalism risk, given the high volume of users and nature of the use of the facilities. Operators and funders have traditionally been reluctant to take full vandalism risk over the term. Unlike BSF, the leisure contract does not contain any specific drafting around vandalism and the operator is expected to manage this risk and it is likely, therefore, that vandalism risk will continue to be an issue for debate on each project. Further, whilst the guidance notes state that accidental damage and vandalism issues will need to be considered on mixed use PFI projects, such as where libraries and health facilities are procured alongside leisure facilities, the pack contains no model drafting or further detailed guidance to assist authorities in this regard.

The option of procuring the leisure facilities through a mixed use project is discussed in the guidance document, the potential for a joint strategy with BSF being given as an example. Indeed, the synergies between community leisure facilities and the BSF programme would suggest real opportunities for a joint strategy. However, there is little in the way of specific advice or drafting suggestions as to how this should be approached under the contract. Guidance is limited to drafting notes on the possibility of reciprocal indemnities and an obligation not to impede service delivery where the authority shares occupation of the premises and does not address the important design, commercial and risk issues that experience on closed mixed-use leisure PFIs would suggest arise.

The guide recognises that leisure projects will often include a non-profit distributing organisation (or ‘leisure trust’), often charitable, for the purpose of securing favourable treatment on VAT and/or national non-domestic rates. However, guidance on the issues arising from such structures is limited and does not consider in detail the risks for authorities or the commercial considerations to the private sector of such arrangements.

The inclusion in some projects of outdoor leisure areas such as all-weather pitches is considered in the pack but unfortunately guidance on how to address this is limited. Outdoor facilities can raise separate issues to those of the core facilities addressed in the drafting and will need consideration on a project specific basis.

Other leisure-specific clauses include provisions for use of the facilities for elections and leisure specific quality management in the form of ‘Quest’ accreditation, a Sport England-supported quality scheme for sport and leisure facilities in the UK.

Finally, SoPC4 included a requirement upon authorities to include in their contracts a well-developed change protocol outlining the agreed procedure for dealing with changes to the services over the life of the contract. A generic, accommodation-based protocol has been published by 4Ps. Authorities and their advisers will need to use this as a basis for their sector- and project-specific version.

In conclusion, market-accepted standard drafting should be welcomed in a sector in great need of significant investment to replace and upgrade ageing facilities. The extent to which the leisure pack addresses sector specific issues and is accepted by the market will be seen in due course and the diverse nature of community leisure facilities and services means that project specific issues will invariably bring their own challenges. Moreover, with a view to the wider picture, the leisure pack itself cannot solve the major challenge facing local authority leisure services, namely the need for a significant injection of funding to enable the much needed programme of investment in community leisure facilities. Whether part of the solution will include a move towards joining leisure in with procurement of secondary schools under the BSF programme remains to be seen.

Tell us what you think – have your say below, or email us directly at [email protected]