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Regular feature: Issue 544 30 Apr 2010

An Excellent Venture: consultant plans route to a ‘different future’ with in-house technical teams

The ‘more for less’ agenda does not have to be about low-cost, blanket services and externalisation, argues provider AECOM

The Future of Local Transport Delivery

There have been suggestions from some consultants that The Future of Local Transport Delivery is greater outsourcing and the demise of transport departments and officers. But AECOM, by contrast, says it “sees a different future”.

Peter Yendall, a director at AECOM, says: “Our approach has been to favour joint public/private models that require the retention of in-house teams, such as joint venture companies, over externalisation. We value the different perspectives that our local government partners bring to our thinking.” AECOM is currently talking to existing and potential clients about forming new joint venture companies.

One existing client that has been actively exploring the idea is Suffolk County Council, which in 2007 authorised the development of a joint venture with the private sector for the delivery of highways services.

The county’s cabinet accepted that, while the arrangement of having a strong in-house transport team and external consultants and contractors – AECOM as transport consultant, Carillion as contractor – had served it well, the service faced severe revenue pressures, so a new delivery model was needed. The project was only put on hold because of Government proposals for unitary local government.

Suffolk’s officers said that a joint venture company would deliver efficiency savings by providing an integrated team, whilst still allowing “local service delivery and a strong public service ethos”.

Yendall comments: “Joint venture companies are a model that both AECOM and many local authorities are comfortable with. Councils are saying, our budgets are being cut right back, but we have a fantastically efficient and capable team of people. They may not have much work now, but they still are a fantastically efficient and capable team that can be put to use rather than lost.”

The added advantage to retaining in-house teams, he says, is that “they can win work elsewhere, providing a source of income to be investing in the authority’s local transport network”.

 An issue, however, he accepts, is whether local authorities are prepared to risk the venture losing money, as well as to grasp the opportunity of generating additional money, on top of retaining their staff. “If we apportion risk on a fair basis, it’s a good opportunity,” he says. The alternative, of simply handing over transport functions to private sector providers wholesale, also has risks, he highlights. “The assumption is often, ‘we can make people redundant in the public sector, because work will pick up in the private sector and more jobs will be generated there, but that is a risky assumption”.

AECOM wants local authorities to continue to invest in technical skills, something that he thinks can be made possible by the private and public sectors coming together within joint venture companies or else more integrated teams to provide joint training. “We can continue to drive cost out of local service provision through sharing overheads such as staff development and training.”

But why do local authorities need to retain technical skills in-house? It has been highlighted by many contributors to The Future of Local Transport Delivery series that councils are finding themselves with more resources than they need, given a reduction in budgets already taking place.

Explains Yendall: “Consultants need clients who can define, recognise and reward quality service provision and innovation from their private sector partners as they seek to deliver reduced costs.  A strong private sector needs a strong, informed public sector.” This is why Yendall thinks that it is wrong to say that procurement professionals will become more important to local authorities than transport and highways staff.

“If you’re going to encourage quality services and innovation, we need a move away from prescriptive procurement, and a move towards contracts that only ask for outcomes, and so aren’t a few inches thick.”

Yendall cites the example of a local highway authority issuing an invitation to tender for a bridge engineering project in order to maintain a footway over a bridge whilst providing new bus priority measures by building a new structure on the bridge. “We suggested a traffic management alternative to providing bus priority over the bridge so that no capital work was needed. It did the same job for much less money,” he says.

If the local authority had only asked for the outcome in the first place, rather than specifying in detail how it wanted the solution it had already arrived at delivered, it would have saved still more money, he says.

However, innovative responses to tenders require a client with the in-house transport expertise to assess different alternatives, Yendall stresses. “A procurement professional would have looked at our tender response and could only say ‘that’s not compliant with the specification’. A transport professional would be able to assess the pros and cons of different transportation solutions.” The question is: how to encourage money-saving innovation?

“The easiest thing for a consultant to do is to just submit compliant bids: to give a local authority client exactly what they ask for. To encourage more innovation in both project and service contracts, we need to get away from writing detailed specifications and performance indicators.”

AECOM is advocating new, pared-down ‘alliance contracts,’ originally developed for the North Sea oil industry, to replace what it sees as the current overly-legalistic contracts that attempt to anticipate every situation and allocate financial responsibility for everything that could go wrong. They were developed for major projects where risk is difficult to quantify – but Yendall says that their use for service provision is worth exploring.

“We need contracts that avoid the blame game, with a ban on disputes, no warranties, clear limitations on liability, and a painshare/gainshare arrangement.  That would leave consultant/client teams to focus on delivery and performance, rather than managing liabilities under the contract.”

“Service contracts that do not attempt to anticipate every eventuality, and provide legal recourse for each possibility, will free up contractors and clients to focus on delivering transport outcomes.”

He says that AECOM believes that costs can be brought down by sharing out risk and reward on an equitable basis, rather than by try to shift it from one to another – which involves employing expensive teams on both sides to protect the respective interests of each. But he acknowledges that this would be dependent upon local authorities being prepared to take the risk of failure, as well as of success.

“The same goes for joint venture companies: all the risk can’t be offloaded to the private sector without this incurring upfront costs. Pain-share/gain-share arrangements giving all parties a stake in both success and loss will bring the cost of contracts down.”

Performance-based contracting is the other procurement innovation that Yendall says offers scope for producing efficiency savings. “It comes back to encouraging providers to innovate and decide how best to deliver.” He says that true performance-based contracting is not based upon local authorities including ‘key performance indicators’ within a contract that providers are then asked to deliver.

“These indicators are often defined without any input from the provider. That’s not the same as starting a procurement process by simply explaining what the desired outcomes are, and then asking the bidders: ‘tell us how it will be delivered, how it will be measured, how it will be rewarded’.”

Performance-based contracting, used extensively across the world, is often seen as a tool for specific types of work: a building owner using an energy revenue stream to incentivise a contractor to introduce energy saving measures sufficient to fund his activities, for example. Yendall says that such ‘invest to save’ strategies – involving a much lighter touch in terms of contract documentation and compliance monitoring –could be applied to service and maintenance contracts.

He says that many public sector clients try to include performance based elements in their contracts but are often disappointed that the market response is defensive and risk averse.

“Perhaps we can encourage the right response by combining a willingness to loosen the strings attached to public sector funding with new forms of contract more suited to outcome specification.” He adds: “There is often a downstream revenue saving from upfront investment. So, in highways, you can identify a future revenue saving from investing capital money now. But we need a way of capture those savings that would be made in a few years’ time.”

‘PFI-lite’ (private finance initiative) is one method under discussion in the industry. “The procurement for PFIs is too long and expensive, and the contracts are too long and inflexible. But the principle of using private sector investment to deliver public benefit is right.”

A major obstacle to efficiency savings, however, is the continued separation of capital works from operations and maintenance, he says. “Separate capital and maintenance budgets encourage silo thinking, which often fails to deliver the real prize of the lowest lifecycle costs.” Lower cost construction can mean higher maintenance costs over a number of years, for example.

“Why is the Government only offering a single capital pot? We need to better take into account the revenue costs of spending a given amount of capital money on construction.”

Yendall fears that the current focus on doing ‘more for less’ entails an over-concentration on bringing unit costs down. “We can’t only look at short-term costs, and lose sight of the need to reduce whole-life costs. As guidance on achieving excellence in construction underlines, money spent on good design can be saved many times over in maintenance costs.”

Rising public expectations are another reason why he warns against “low-cost, blanket coverage” of transport services. “We need a smarter targeting of transport service provision, and to use new technologies.”

By way of example, he cites how teams of people used to identify bulbs that needed replacing in streetlights. That approach was replaced by bulk replacement of bulbs, which was more cost effective than replacing them one at a time when they had blown – even though it meant replacing some that still had life in them. “Now, we can identify whether bulbs have gone with new detection technologies, satisfying the public demand to be more cost effective.

“That’s why we need to keep challenging the way we’re doing things and asking ‘is this the still right? Could we do this better?’” He acknowledges, however, that strong business cases need to be drawn up for ‘invest to save’ measures that cost more in the short-term.

“Meeting rising public expectations does not always mean spending more and more money, or even spending public money.” Cisco has developed a travel planning system for Seoul in South Korea that can provide people with information about alternative journeys across all modes. “You can find out the quickest option, the lowest cost option, the option with the lowest carbon dioxide emissions, all through your smart phone.”

In time, Yendall agrees that such systems could replace the armies of personalised travel planning assistants that ‘smarter choices’ programmes entail – provided that the UK reaches South Korean coverage of high-speed broadband and the use of personal computers and also provided that the public sector can facilitate private sector innovation, which returns to Yendall’s theme that the ‘more for less’ agenda should not mean losing good in-house transportation professionals who can work with the private sector, including the major IT companies now interested in the transportation sector, to formulate new tools and methodologies that achieve public objectives such as reducing the need to travel and reducing congestion.

He says: “We will need high calibre technical officers in local authorities to act as client for this new, more personalised service provision, understanding what quality service looks like and rewarding those contractors who can deliver it.” 

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