Articles

Comparing cost

Email this to a friend Print Delicious Digg Facebook Reddit

by Paul Maltby, public and private partnerships
PFI Journal - 30 April 2003

In recent months ippr has added its voice to those calling for a review of the PFI. Unlike most of the others on this growing list we aren't interested in attacking the PFI or private companies. Rather, we are concerned about ensuring that taxpayers get value for their money.

The problem is that there is a dearth of evidence about value for money and the PFI, and what evidence there is is notoriously difficult to interpret. This confusion has only added to the ill-tempered political debate about the PFI and the wider role of the private sector in the delivery of public services. Unless the question of value for money is seriously addressed, the PFI will continue to come under a destabilising barrage of criticism.

Value for money in the PFI

Government judges value for money in PFI projects by comparing the cost of company PFI bids with a 'public sector comparator'. Project managers will only get their revenue stream from government if the PFI bids come in lower. Taken at face value this might suggest that all PFI projects are good value for money by definition.

ippr's report into PPPs in 2001 Building Better Partnerships looked at all the publicly available evidence comparing bid costs with public sector comparators. The results were mixed. Although some projects for roads and prisons showed significant cost savings (of around 15 per cent), others - such as school and hospital schemes - demonstrated more marginal savings of between two and four per cent.

These figures must, however, be treated with caution. Most project managers know that they will only get permission to build their new assets if the PFI scheme comes out cheaper, regardless of how marginal the supposed savings are. For example, the new Ministry of Defence Building in Whitehall is set to cost £746 million. This represents a saving of only £100,000 over 30 years (0.1 per cent), compared with the public sector comparator (something the House of Commons Public Accounts Committee has rightly highlighted as a 'spurious' figure).

In 2002 ippr returned to the publicly available evidence on cost comparisons between PFI bids and public sector comparators. Out of the 378 PFI projects completed by central and local government at the time only 23 projects (6 per cent) had had any independent examination of value for money by official audit bodies. Again, we found that the PFI picture was mixed: some deals demonstrated significant evidence of lower costs, whilst others, notably school PFIs, languished behind.

Moreover, these calculations only tell a part of the story. Not only do they deal with predicted costs rather than actual costs, they also take no account of differences in quality - a key issue in public service delivery. As the PFI matures, evidence about what it delivers in practice is becoming available. However, again, what evidence there is remains mixed.

The National Audit Office examined construction performance in the PFI (published February 2003) and found that it had significantly improved time and cost certainty in public procurement. It found that 22 per cent of PFI projects had run over budget compared to 73 per cent of government construction projects, and that 24 per cent of PFI projects were late, compared to 70 per cent of government projects. This level of improvement represents a serious achievement for the PFI.

In contrast, evidence about the quality and cost of PFIs in operation is less positive. An Audit Scotland report on schools PFIs in June 2002 praised councils for implementing the schemes well, and highlighted that some of the presumed advantages of the PFI had indeed been realised. However, they also dismissed any cost advantages as 'narrow'. In addition, an Audit Commission report in January 2003 went into more detail about how the operation of early PFI schools compared to conventionally financed projects. The results were not good news for the PFI industry. Five 'design quality matrices' were assessed by construction professionals: architectural design, building services design, user productivity, ownership costs, and detail design. The quality of the PFI schools was worse than the traditionally financed sample on all five counts, and were 'significantly worse' on four. The synergies expected to come from the PFI process had failed to materialise. This type of auditing exercise must now be urgently repeated across other policy areas, particularly in the NHS and prison sector.

Where next for the PFI

The Department for Education and Skills has responded to the criticisms of schools PFIs with new proposals for establishing joint venture companies to deliver projects through a different structure, although still using PFI as a procurement method. This structure is inspired by the LIFT PPP project for primary health premises and is initially being piloted in Church of England schools.

The revised structure aims to resolve criticisms of PFI architecture by promoting six national 'exemplar designs', which local authorities can tailor to their local needs. It also seeks to address the problem of local government staff being relatively weak and inexperienced when negotiating with the private sector by creating a 'national procurement vehicle' with highly skilled commissioners negotiating centrally on behalf of local authorities.

The DfES is to be congratulated for listening to its critics and indicating its willingness to change. The new model rejects the previous assumption that improved quality would result from bringing together the design, building finance and maintenance of an asset.

However, the model raises potentially difficult issues surrounding financing. If the financing of schools projects is bundled together this could have some advantages, not least in lowering costs. But it means that financing will not be dependent on specific projects, and as a result projects will lose the important scrutiny effect that can be provided by private financiers and rating agencies. An alternative to such a scenario is to limit new contracts with the private sector to construction and operations, with design and finance both provided by the state.

Another major source of contention regarding PFI policy is the degree to which services should be included within deals. Currently most PFI projects limit private sector involvement to support services, although prison PFIs and the new Diagnostic and Treatment Centres in the NHS also feature core service delivery undertaken by the private sector.

In the current political climate the PFI is likely to remain primarily for construction. The Government is wary about relying on contracts alone to secure the public interest for complex and high profile services. In our latest publication In the Public Interest? Assessing the potential for Public Interest Companies ippr argues that new models with stakeholder ownership, such as foundation hospitals, are likely to become the government's vehicle of choice in such situations for some years to come.

Conclusion

There is nothing wrong with the PFI in principle. But the policy has to be seen to deliver in practice. We need more evidence about how the PFI is performing, and to this end ippr would like to see a major audit review of PFIs across the public services. We do not desire a moratorium on the PFI, and do not harbour any antagonism against the policy or those using it. Indeed, schools were always expected to receive limited benefits from the PFI process, and so audit reviews across other public services are likely to show the PFI in a more favourable light.

The PFI can and should stand up on its own two feet alongside other procurement options. However, the benefits of a moving away from the PFI monoculture that has developed during previous few years would not be restricted to taxpayers and users. The challenge for the industry is to welcome honest independent evidence on the performance of the PFI, to encourage government to change the PFI where necessary, and understand that the PFI will not always be the best option available - particularly for the delivery of key public services. These are essential preconditions to the political heat being taken out of the difficult public debate on the PFI.