Nick Maltby, Partner, Bircham Dyson Bell:
The recent announcement by the Treasury to find £1.5 billion savings across the 495 operational Private Finance Initiative (PFI) projects in England and recycle them into frontline services does not seem overly convincing to me.
The announcement is part of an ongoing programme of reform to improve the cost effectiveness and transparency of PFI contracts which began back in February. The savings findings arise from a deep dive into the Hospital PFI contract at Romford. The report was originally due in the Spring. The report has been published against a general background of hostility to PFI evidenced by Jesse Norman MP’s campaign for a 0.5% rebate (worth £500bn), a debate in Westminster Hall and hearings before the public accounts committee. Weaknesses cited include:
- The inflexibility and cost of PFIs.
- The lack of control on equity returns.
- The foreign tax residency of many PFI companies.
- Some of the wilder aspects of PFI including £200 quotes to change a light bulb. Notorious examples cited include, the £82m capital cost Worcester PFI Hospital will cost taxpayers £852m over 30 years, the Norwich PFI Hospital where the return on equity increased from 18.9% to more than 60% following a refinancing and the Defence Animal Training Centre where it cost more a night to house animals than the London Hilton on Park Lane.
The central recommendations of the updated guidance are that operational savings can be achieved principally from the more effective management of contracts (including performance regimes and cost/gain share mechanisms), the efficient use of space and a review of soft services requirements. The guidance sets out steps to be followed when conducting a contract savings review and when considering changes to a contract. For those contracts that do not have SoPC4 transparency provisions these should be adopted as should a variations protocol and the Government intends to agree a code of conduct reflecting this. Particular areas dealt with by the guidance are:
- How to approach insurance provisions while the Government considers self or pooled insurance.
- Encouraging users to reduce energy consumption and implementing smarter energy purchasing.
- Sub-letting, increasing occupational density (as in the Treasury Main Building) or moth balling PFI assets where necessary.
- Reviewing the service specification to ensure it meets current needs and remove services but having regard to the impact on interface risk.
- Aligning value testing exercises for public bodies with multiple projects.
- Taking back the provider’s share of change in law risk.
Advice should be sought from departmental PFUs and the Operational Taskforce in PUK as necessary.
While the updated guidance is quite measured and contains some sensible suggestions, little of it is radical and it has taken just short of six months to announce these modest proposals. I just don’t see how we can save £1.5 billion from more effective management of contracts, the efficient use of space and a review of soft services requirements and there is no mention of the time period in which the savings should be made, which could be as much as 30 years. Anyone involved in PFI could have told those looking for the savings that they would be hard to find and that it would be akin to squeezing blood from a stone. Whether they will achieve these savings remains to be seen.
At the same time, the Education Secretary, Michael Gove, launched plans to raise £2 billion in PFI funding to build and improve up to 300 schools, opening it to local authorities and schools whose funding was pulled under the old Building Schools for the Future programme.
Given all the recent criticism of PFI from the coalition government, Gove’s announcement is welcome but surprising. It remains to be seen how the new PFIs will differ if at all from their predecessors and to what extent changes might be made (for example, on sharing increases in return on equity). The National Audit Office (NAO) has written over 80 reports about PFIs and it makes the same recommendations again and again in its reports – yet few of them ever seem to be implemented. The PFI industry would welcome positive change but I just don’t think anyone in government understands the detail enough to implement the changes.
The bottom line is that PFIs are a good way to build infrastructure for the country. We simply can’t afford to put up new buildings and build new infrastructure without PFIs as although government can borrow more cheaply it would have to account for the whole cost of a capital project in the year incurred rather than being able to spread it over several years. There is a lot that could be done to improve PFIs if:
- NAO recommendations were taken into consideration.
- International best practice, particularly in Australia and Canada, where procurement times are shorter, funding committed at bid submission and Government teams lead the projects, built on.
- A less rigid approach to standardisation was taken.
It’s clear that although the government has been hugely negative about PFIs and is quick to criticise them, they agree that it’s a valid way forward – hence the announcement in education. Whether the finalisation of the Report on PFI Savings combined with the announcement of the first new projects will mark the end of the anti-PFI campaign remains to be seen but Jesse Norman has already indicated that the £1.5bn potential savings is the sort of number he was in any event looking for through his rebate campaign.
I hope that the savings announcement draws a line under the negativity around PFI as an infrastructure option and focuses instead on what might be done to make it work for the country in the next decade. At the end of the day what we all want to see in growth and investing in infrastructure would be a great place to start.