PLC Public Sector reports:
The National Audit Office (NAO) has published a number of reports recently on the use of PFI and value for money in public procurement generally. Each of them contain a recurring message, public authorities need to keep a close eye on value for money on a project-by-project basis and not automatically pursue a particular procurement route (whether it be PFI or any other option) because they are told it is the correct thing to do or because they assume it is the cheapest way of doing things.
With every new day seeming to bring fresh news that another project or, in some cases programme, has been axed, public authorities and their advisers need to learn the lessons set out in these NAO reports.
The most high profile of the reports lets us start with some good news. In its report, Financing PFI projects in the credit crisis and the Treasury’s response, the NAO looked at the action taken by the Treasury to mitigate the credit crisis. This included the creation of the Infrastructure Finance Unit, which, among other things, provided public money to projects that were in danger of collapsing due to the unavailability of private finance, for example, the £3.8 billion Greater Manchester waste PFI project. The report concludes that the Treasury policy of agreeing to pay the prevailing market rates to banks that were willing to provide the finance necessary to bring projects to financial close, even if this meant paying more and banks carrying less risk:
- Helped reactivate the market and prevented the stalling of many government projects.
- Obtained good value for money from its investment (the increase in finance costs to the public sector as a result of completion of the projects in 2009 is estimated to be between £500 million and £1 billion).
However, the report also contains a warning from the NAO that, to the extent that any project is able to proceed in the current climate, the time for paying whatever the banks want to charge is over. The business case for any project must ensure that the chosen procurement route will offer value for money in light of the specific requirements of the project and this business case must be kept under review. The report also looks to the potential alternatives to PFI that may be suitable for delivering infrastructure in the future, referring to the Olympic and Crossrail projects which rely to a much greater degree on public finance. Potential alternatives to PFI mooted are:
- The French approach of providing government guarantees for 80% of borrowing in respect of operational projects to reduce finance charges.
- Public loans structures based on the not-for-profit European Investment Bank structure.
Whatever the ultimate solution, or more likely solutions, as to how infrastructure is financed in the future (and not wanting to start an argument about whether placing up to £1 billion into the hands of the banks when it could have been introduced directly into the economy was a truly satisfactory government response), it is clear that the blind assumption that PFI is the answer must end. This is evidenced by the NAO’s report, PFI in Housing, which acknowledges that PFI had been a “flexible and useful funding route for local authorities”. However, the report also highlights that all of the projects reviewed had suffered delays and 21 out of 25 had experienced cost increases (12 of which were over 100% and 1 over 300%!).
Such figures are all the more concerning when it comes to light that
“[the DCLG] has not attempted to compare the value for money of the PFI option compared to other investment routes for refurbishing council housing”
and that
“Local authorities have reported that their initial choice of PFI was driven by the funding structures of the Department and policy constraints rather than a pure focus on value for money.”
Clearly, this is not a way to manage such a significant issue.
There is a more positive message for PFI in the NAO report, The performance and management of hospital PFI contracts, which states that PFI contracts in the health sector are generally being well managed. However, the report does highlight an issue that is likely to be facing the coalition government shortly. There have been numerous reports about government moves to push down the costs of existing contracts as part of its drive for efficiency savings. One problem facing the government if it wishes to do this is that the structure of many PFI contracts means that the only way of making such savings will be cut back on services – something that it has been keen to make clear it will not do in the health sector.
Our final stop on this tour of NAO reporting moves away from the subject of PFI. The NAO report Reducing the cost of procuring Fire and Rescue Service vehicles and specialist equipment, makes one clear key point. Unless public authorities are mandated to use central purchasing bodies such as Firebuy, the specialist procurement body established by the DCLG to support the procurement of kit by Fire and Rescue Services, they are doomed to fail. Fire and rescue authorities are not obliged to use Firebuy and as a result Firebuy has only achieved savings equivalent to half of the cost that it took to set it up.