Committee for Finance and Personnel Report (2007-2011 Mandate)

DFP Follow up Response

6 SEPTEMBER COMMITTEE QUESTIONS RELATING TO WORKPLACE 2010 AND LOCATION OF PUBLIC SECTOR JOBS

Workplace 2010

1. What independent evidence exists in support of moving to a predominantly open plan office configuration? What importance will the fuller evaluation of the Clare House pilot project have in this regard and will its delay until mid-December affect the progress of WP2010?

What is being introduced for the Civil Service is not new or revolutionary. It is now standard practice in the public and private sector worldwide and there is widespread evidence to show how open working – with the right design and technology – can drive change and efficiency through new ways of working. In June 2006 the National Audit Office (NAO) published a report “Getting the best from public sector office accommodation” which reviewed many public and private sector case studies and recommended that all departments should “assess the advantages of adopting flexible approaches to their estates” and “use any property project as an opportunity to achieve wider transformational or cultural change”. Among other elements it recognised the potential benefits of open plan environments supported by break out areas.

“Working without Walls”, a joint Office of Government Commerce/DEGW publication (2004), highlighted several leading UK government organisations who had turned their need for accommodation into an opportunity to support significant business change, again citing open plan environments as an important element. The programme team has visited many of these organisations, all of whom have carried out full evaluations of their projects. All were clear on the success of the new open office design.

Workplace 2010 therefore drew heavily on existing best practice and the extensive use of open plan in both the private and public sector. The move to a predominantly open working environment is one of the key underlying principles. So the question is not whether we move to open working but how we do it and although there is plenty of evidence available we did think it was important to run a couple of pathfinder projects and to learn the lessons which could then be adopted in the final specification.

The full evaluation of first pathfinder project, Royston House, was published by NISRA in April 2006. It concluded that “the open nature of the new working environment appears to be generally accepted by staff and seen to enhance many collaborative aspects of their work”.

The Clare House full evaluation is intended to provide lessons on the specific implementation of Workplace 2010 within the building. In addition both the Royston and Clare House pathfinders, along with the experiences of other public and private sector organisations will inform the wider programme more generally and contribute to the final nature of the Workplace 2010 contract. As things stand the evaluation of Clare House will be carried out over the next couple of months and given that we are unlikely to be signing a contract until this time next year there will be ample time to ensure that any lessons learned are fed into the final specifications. The publication of the evaluation report in mid-December will therefore not impact on the timescales of the programme.

2. The Committee’s report highlighted concerns, by the Westminster PAC and others, around the use of public sector comparators (including that they are given too much weight and should not be used as conclusive evidence of value-for-money). How is the WP2010 project team assuring itself that value for money will be maintained through the negotiation process to contract completion?

The Public Sector Comparator (PSC) was used at the outline business case stage as an indicator for selecting the preferred procurement route for this project.

The PSC was prepared based on a very detailed review of actual property related costs incurred by NICS Departments on the properties in the Workplace 2010 deal as well as independent estimates of refurbishment costs that would be required to meet the WP2010 specification. This process was in line with Treasury and Green Book guidance and showed, at that time, that a PFI procurement was significantly cheaper than a traditional procurement. The outline business case was assessed and approved by DFP Supply before the procurement process began.

On receipt of bids at the Invitation to Negotiate stage we factored the bid prices into the business case which demonstrated, even at that early stage, that the value for money position had improved. These figures were shared with DFP Supply and it was on this basis that the department was able to give further assurances to Ministers and the Committee. During negotiations at the next stage of the procurement we will be seeking, through competition, to secure the best possible deal. Value for money will again be considered as part of the final business case when all negotiations have been concluded. The final deal will also be compared with an updated PSC.

DFP Supply will then perform a further independent assessment of the business case and provide assurance on the value for money of this programme.

3. The Department’s response states that an independent valuer will assess a representative number of the WP2010 properties at Best and Final Offer. Will this be in addition to a public sector valuation, undertaken presumably by Land and Property Services?

Yes. A valuer has been appointed and is expected to report their findings to the department in the next month. By doing so we are seeking to obtain an independent view over those freeholds with highest existing use value and largest development potential to ensure that we are getting maximum value for the assets to be transferred.

The 16 buildings to be valued are:

• The Stormont Estate  
• Adelaide House, Belfast
• Clarence Court , Belfast   
• Castle Court , Belfast
• Corporation Street, Belfast
• Hydebank, Belfast
• Netherleigh, Belfast
• Rosepark, Belfast
• Ballymena County Hall
• Coleraine County Hall
• Marlborough House, Craigavon
• Rathgael Buildings, Bangor
• Rathgael Car Park, Bangor
• Orchard House, Derry
• Waterside House, Derry
• Rathkeltair House, Downpatrick

Will there be an update on the valuations prior to contract signature?

Yes.

4. When the Department reassesses the procurement options at the Final Business Case stage, what weighting will be given to the long term and indirect benefits and costs, compared to the short term and direct benefits and costs?

When reassessing the procurement options at FBC stage there will be no weighting applied to short and long term costs and benefits. Key elements such as value for money and affordability are assessed across the lifetime of the contract. Qualitative or indirect benefits are also a key part of the business case which ensures that decisions are not based entirely on cost. The ITN, for example was evaluated on quality as well as financial and legal aspects. The same criteria will be used to evaluate BAFO bids.

As things stand the contract will cost broadly the same amount of money as is currently spent on the estate but it will deliver a whole range of benefits including a major refurbishment programme. Short term gains such as the capital payment are only one component in a complex multi layered PFI contract and whilst the capital payment is very welcome the Committee can be assured that the long term costs and benefits will be very carefully assessed.

What are the key risks and uncertainties that the Department plans to take account of in this project?

The key risks in this project include cost overrun on, for example construction, refurbishment, maintenance and operating costs. There are also risks around performance and demand.   Our primary protection comes from the legal contract which is compliant with existing NI guidance on the Standardisation of PFI Contracts. The contract governs our relationship with the successful bidder, and the management of that relationship, through a dedicated Contract Management Unit.

On the issue of construction cost and timescale overruns we have protected ourselves via a fixed price contract for delivery of the totality of the works.  We have also created financial incentives to ensure that the construction/refurbishment programme is completed on time by withholding an amount of the unitary service charge until the entire capital programme is completed.

Another risk relates to the requirement for the private sector partner to maintain the buildings to specified standards. This will be managed through agreed annual maintenance plans. The partner will also be required to commission, and act upon the results of, periodic independent condition surveys of the Workplace 2010 buildings.

Operating cost risk relates to the cost of delivering services.  Although we will have a fixed price contract for all of the services under Workplace 2010, Treasury currently recommend that soft services (for example catering and cleaning) are market tested at intervals throughout the contract life. This requires the private sector partner to run a new procurement exercise for soft services and ensures that we continue to pay market rates.

Aside from the range of contractual remedies for breach of contract we have developed a Performance Management System, in line with industry good practice, that monitors key performance indicators on a monthly basis against required levels of service. If the required level of service is not delivered we do not pay the full USC for that month. Persistent breaches would be escalated and could result in a change in subcontractor, or in an extreme case, breach of contract.

In the unlikely event that the partner becomes bankrupt the NICS' interests would be protected through contractual provisions that deal with contractor default.

We can therefore assure the Committee that key risks have been well thought through and provisions have been made through the contract and the performance management system to manage all of these in a way that safeguards the NICS’ interests to best effect.

The key uncertainty that the Department will retain and will be required to manage relates to demand risk i.e. the exact amount of accommodation that NICS will require over the life of the contract. The contract will deal with demand risk uncertainty through the provision of flexibility which is described further below. In developing our flexibility options we have considered other similar contracts as this type of approach is not unusual. The PRIME contract in Great Britain, for example had to accommodate the unforeseen amalgamation of social security and employment services. This was handled very successfully and was acknowledged accordingly by PAC and the Audit Office.

What steps will you take to ensure that the contract provides the Executive with the necessary degree of control and flexibility over its estate?

The contract is intended to engender greater flexibility for the civil service moving into and out of properties as its needs change.

At one level the draft contract already provides us with ultimate flexibility as it allows us to vacate any and/or all buildings within the estate subject to payment of compensation to the private sector partner. However this would be very costly indeed. So to ensure that we get the best price for flexibility through the procurement process we have asked bidders to pre price the cost of flexibility under competition. This means that the NICS will know with certainty upfront much flexibility will cost from the outset of the contract and future decisions can therefore be taken in this context.

How will the contract address the issue of long-term flexibility as the needs for accommodation change over the life of the contract?

As above.

5. The Department’s comments concerning transparency and the reporting of PFI financial commitments are noted. In light of this, what information does DFP intend to provide to the Assembly in relation to the long-term financial commitments of this and, indeed, all other PFI projects?

On a half yearly basis we will complete a PFI Commitments Report that will track, for this project, the estimated and actual unitary service costs for the duration of the contract. These reports will be submitted to HM Treasury via DFP.

Each individual Department is responsible for monitoring its own PFI projects and reports on these annually in their Accounts which are laid before the Assembly. Accounts are subject to scrutiny by Internal Audit Branches and by the Northern Ireland Audit Office.

6. To what extent does the Office of Government Commerce Gateway Review process assess the underlying assumptions, calculations, analyses, conclusions and recommendations contained in the Final Business Case? Does Gateway not focus more on auditing process and methodology?

The gateway review process does not explicitly consider the commerciality of the business case. This role is undertaken by DFP Supply. 
However, gateways are designed to provide assurance that a programme can proceed successfully to the next stage as well as the robustness of plans and processes and the likelihood of successful delivery. Gateways involve investigating the outline and full business cases, delivery strategies, governance arrangements and benefits realisation. In doing so the process ensures that all the proper processes have been applied and that the appropriate stakeholders have been engaged in the governance and decision making processes. This is absolutely key in providing the necessary assurances, for example, that programmes are being well managed, that business needs are being met and that both the NICS and private sector partner are in a position to implement and manage the contract.

What does the review by DFP Supply entail and can this be regarded as fully independent?

DFP Supply will review the final business case for Workplace 2010 which is in line with Treasury guidance and includes:

• Procurement strategy
• Specification of requirements
• Risk allocation
• Indication of bankability
• Key contractual terms and conditions
• Suitability of advisors
• Procurement process and timetable
• Stakeholder consultation
• Value for money assessment
• Benefits realisation
• Arrangements for Post Project Evaluation

The role of Supply includes the making of recommendations on the optimum distribution of resources to NI Programmes and to ensure that NI Departments spend money for the purposes agreed by the Assembly.

Supply operates independently of Departments, including DFP (though it is a part of DFP for administrative purposes), and its reviews are totally objective. It is an integral part of the Central Finance Group which broadly equates to the Treasury in Whitehall.

Is WP2010 receiving additional independent scrutiny given the scale and importance of the project?

There is no additional independent scrutiny planned. The point that needs to be made here is that any further scrutiny would be an enormous and very expensive undertaking. Given the complexity of the contract an assessor would probably have to qualify their findings thus making the scrutiny untenable. The Committee should also note that, in developing this contract the Department is already paying for independent advice from a very experienced team of technical, financial and legal advisers who are bringing their extensive knowledge of other contracts and best practice to bear.

In our view Supply approval provides the necessary independent assurances. The only other viable scrutiny is one of process and we believe that the Gateway review fulfils that function. However we have also put in place an Independent Compliance Committee chaired by the Department’s non executive director. This Committee is responsible for providing assurance on the fairness and integrity of the procurement process on the basis that by getting our processes right we have the best chance of the best outcome.

Location of Public Sector Jobs

1. Does the present reactive policy on dispersal (i.e. where value for money must be demonstrated in respect of any opportunities which arise) take account of potential longer-term economic, social and environmental benefits of dispersal?

The present policy on dispersal which refers only to Civil Service jobs, was issued in March 1999, and required that any economic appraisal of options for dispersal would be carried out in accordance with the guidance issued at that time and the Northern Ireland Preface to the Green Book.

The guidance required that any appraisal of options covered impact upon a range of issues and highlighted specifically equal opportunities, New TSN and the Regional Planning Strategy including transportation.

Current guidance on economic appraisals, set out in the Northern Ireland Practical Guide to the Green Book, contains a section dealing specifically with accommodation projects. The guidance requires, for all appraisals, consideration of the relevance of a range of issues including, for example, environmental impact.

8. What does the Department see as the scope and core elements of the Terms of Reference of the proposed review of policy options?

9. Will the review consider how best to maximise the longer-term economic, social and environmental benefits from an affirmative dispersal policy?

The Minister of Finance and Personnel has agreed to bring forward further detailed proposals on terms of reference for the review to the Executive. He has also indicated that these proposals would take account of the Committee’s views.

Some initial thinking on the scope and terms of reference for the review has taken place and is based on the responses to the consultation exercise, the work of the RPA Estates Group and the recommendations in the Committee’s report. This has concluded that the overarching objective of the review would be to undertake a detailed study to develop policy options on the location of public sector jobs that would enable the Executive to come to an agreed approach on location policy in Northern Ireland. Further proposals on the Review will be passed to the Committee for discussion before decisions are taken.

10. Will the review be completed in time to inform decisions on jobs location arising from the Review of Public Administration?

Once the Executive has agreed the terms of reference and review team membership we would move to get the review underway as quickly as possible. We expect the review to take about six to nine months and thereafter further Executive decisions would be required on implementation and timing. Therefore it is impossible to say with any certainty at this stage if the review would be completed in time to inform decision on jobs location arising from the RPA. However, we would expect any interim decisions to take account of the framework and guiding principles.

11. How will the final Guiding Principles framework and methodology feed into the review?

There could potentially be a requirement to take decisions shortly about where some of the new bodies created as a result of the Review of Public Administration might be located. Therefore, as agreed by the Executive in September 2007, we are putting in place a framework of guiding principles and supporting methodology to provide a robust process for decision-making on the location of these bodies. However, we recognise that in looking at the longer term it is important that this framework is considered as part of the overall review of policy on the location of public sector jobs.

12. The Department’s response points to the ‘flexibility model’ within the WP2010 Best and Final Offer stage as ‘providing the appropriate level of flexibility to accommodate future movement of business.’ When will details on the provisions for future flexibility be made public?

The flexibility model is part of the commercial process and will therefore not be known until negotiations have been completed.