PFI is ’poor value’ say MPs but they ignore the benefits such as risk transfer, predictability and maintenance of the public sector estate
Following the launch of the Treasury Select Committee’s report earlier today, scepticism around the role of PFI in helping to fund major projects is once again top of the news agenda. However, if you scratch beneath the surface and examine the statistics in greater detail a more balanced picture begins to emerge.
While the reality is that a PFI approach may cost the taxpayer more when compared with the equivalent borrowing, the statistics quoted in today’s report compare costs at the tender stage for traditionally procured projects against PFI outturn costs.
Traditionally, public sector projects were known to be on average 10-15% over budget and anything up to 6 months late. PFI has put more discipline in to procurement and although the overall cost of procuring through PFI may be higher, most PFI projects deliver on time at the cost expected at financial close.
Like any contract, not just PFI, if it’s not managed properly the relevant parties will not get the best out of it
Essentially the added expense is the price you pay for transferring risk and greater predictability. The other aspect of PFI that is always ignored is that our public sector buildings are maintained to a set standard rather than being left to deteriorate over time. These obligations cost money but are often left out of the analysis of the value that PFI brings to our public sector estate.
There are many aspects to PFI that could be improved, and indeed lessons have been learnt throughout the decade of using PFI as a form of procurement, none more important than building the public sector’s skills to procure and negotiate these complex contracts. The private sector uses experienced teams to negotiate the final contract whereas in the public sector the equivalent team is generally less versed on what will be required to succeed. Furthermore, in many PFI projects the public sector team that negotiates the initial contract changes after the deal has been signed.
This raises a significant challenge as the new team may have little understanding of the deal which makes it difficult for them to performance manage the private sector and ensure they robustly adhere to terms of the agreement. Like any contract, not just PFI, if it’s not managed properly the relevant parties will not get the best out of it .
There is no doubt that PFI is not perfect and in the past has been seen as a ’one size fits all’ approach. It is inflexible and should be used only for the right projects where sufficient understanding by all the parties of the level and types of risk to be transferred are apparent and appropriate. The contract is inflexible to variations so can be expensive to change, however knowing this should allows us to target facilities that are not subject to continuous change.
The elephant in the room remains; if private finance is not used, where else does the money for large infrastructure investment come from?
While some parties within the government have been very quick to write off PFI, they have been less vocal when it comes to offering a better alternative. The elephant in the room remains; if private finance is not used, where else does the money for large infrastructure investment come from? PFI can provide value for money but to ensure that it does it is fundamental that the contract is managed properly and the value of the risk transfer fully taken in to account.
The positive news is that public sector clients are increasingly aware of this challenge and are looking for support around contract management issues to help their staff members who may be uninitiated in PFI. Training contract administrators in auditing will play a key role in helping to ensure that a PFI contract is properly performance managed whilst ensuring that the right Service Level Specifications are embedded in the contract from the very outset will go a long way in guaranteeing they get the optimum value for the level of service that they require.
Russell Gates is a partner at EC Harris