PLC Public Sector reports:
In July 2009, the House of Lords Economic Affairs Committee announced that it was carrying out an investigation into the private finance initiative (PFI) and off-balance sheet debt. No such investigation had taken place for nearly 10 years and, particularly in light of the credit crunch and its impact on the availability of private finance, was most certainly needed.
On 17 March 2010, a report on this investigation was published. While not proposing any seismic shift in public procurement policy, the report does draw some interesting conclusions.
Starting with the good, the report acknowledges that:
- There is strong evidence that privately-financed projects (PFPs) have a better record of on-time and on-budget delivery than traditionally procured projects (although this gap is narrowing).
- Lessons learnt from PFPs have also benefited traditional procurement.
- The higher finance costs created by using private finance do not mean that PFPs cannot represent best value for money when all relevant factors are taken into consideration.
The report also suggests some areas surrounding PFI and its use that need to be reviewed:
- The Government should publish figures for total liabilities for PFPs as a separate item alongside figures for public sector net debt. The Government has also published its response to the report and, while it dances round the issue of greater transparency over PFI liabilities, does not commit to taking this step.
- An “institutional bias” in favour of private finance should be removed. The Government’s response disputes that such a bias exists and therefore rejects this suggestion. Given that allegations of such bias are generally based on the preference for liabilities to be off-balance sheet, it would appear that one way of making it clear that no such bias exists would have been to accept the previous recommendation and publish, in more user-friendly form, full details of PFI liabilities.
- Public sector staff’s commercial skills need to be improved and they need to learn to monitor and manage contracts more efficiently. The Government acknowledges that improvements need to be made and points to guidance issued by the Office of Government Commerce (OGC) on better contract management.
- The Government should consider meeting some unsuccessful PFI bidder’s costs to promote increased competition. The Government does not respond to this suggestion, stating that its investigation into the impact of the competitive dialogue procedure on bid costs will be published shortly. Looking at the option of meeting bid costs is a common sense proposition previously advocated on this site and we await the Government’s report on the issue with interest.
- The Government needs to collect better data on the whole-life costs of traditionally-procured projects so that better value for money comparisons can be made with PFPs. The Government accepts this recommendation but, unfortunately, its commitment to achieving it is minimal. The response simply states that it will “encourage” departments to collect this data, while repeating the report’s original point that the comparable information known about PFP projects is more readily available/robust.
- A comprehensive review of which risks should and should not remain with the public sector needs to be carried and new guidance issued. The Government’s response suggests that existing HM Treasury guidance provides adequate guidance on the approach to risk, but does acknowledge that in certain areas – energy, regeneration, water and communications – further investigation is required and that Infrastructure UK will take this forward.
Among other subjects the report also makes interesting observations on:
- The possibility of a National Infrastructure Bank.
- The need for a National Audit Office investigation into the impact of secondary markets for PFPs that have completed their construction phase on the standards of quality in PFPs.
- How a public sector comparator should be calculated.
While the report does make some interesting points, its general tone is to sit on the fence, the (albeit probably true) concession in the introduction that a final verdict on the effectiveness and value for money PFPs will only be possible “over the coming decades” seems to accept that little can or will change. With the rampant chasing of efficiency savings (where procurement spend is one of the main targets) by both main political parties in the lead up to the general election and ongoing criticism of the entire public sector procurement model, surely Parliament cannot afford to be taking such a fatalistic approach to what is one of the key planks of public sector spending.