Monday, April 24, 2006

PFI Through The Nose

Is the taxpayer getting a good deal from the Private Finance Initiative? The question gets more pressing as the number of such projects mushrooms. According to Treasury figures, since the scheme began in 1987, there have been 747 signed deals with a total value of £47.6bn. And by far the bulk of these- £44bn's worth- have been signed just in the last nine years since Labour came to power.

In principle the Private Finance Initiative could be a good deal for taxpayers. Instead of trying to build and maintain hospitals and schools itself, the government gets private sector specialists to compete for the job. Not only should the price be lower, but the risks of things like project overspend are transferred to specialist operators who are better equipped to manage them. Everybody should win by eliminating waste and inefficiency. Hurrah.

In the real world of course, it hasn't worked out like that. For one thing, this government has used PFI as a tool to borrow off-balance sheet. The best estimate is that PFI debt now amounts to a chunky £60bn, but because of arcane and wholly artificial accounting arrangements, the vast bulk of it does not count towards net public sector debt under Brown's Golden Rules. True, the Office for National Statistics has finally been pressured into reviewing its approach, but no revisions have yet been made, and up until now it's given Brown yet another opportunity for Enron fudge. Which he's taken in size.

Naturally, the pressure to finance new facilities via PFI, rather than through traditional public debt issuance, will have driven through deals which could have been more cheaply funded directly. To much of the public sector it seemed like "free money", which is why so many public bodies are only now realising the full extent of the burden they've taken on. The Queen Elizabeth Hospital NHS Trust in Woolwich has £100m of PFI debt and is now busy slashing jobs to pay for it: their Chief Executive says "In traditional commercial terms we are insolvent. We are relying on temporary cash borrowing to enable us to pay our creditors...it reaches a point where there is no way out."

Even worse, in many cases it seems that the potential efficiency gains from PFI have been dissipated by the shambolic way in which the public sector "partner" has managed the procurement process (see previous post on general public procurement issues). The CBI reported on this last week, spelling out the problem:

"Delays to procurement processes add significant extra costs to the purchases the NHS makes. While the specifications for schemes are being redesigned, or the final arrangements for projects are being reviewed, staff working on the project must be retained, and other fixed costs build up. The NHS recommends that the procurement process for a PFI hospital scheme should take 18 months. But on average it takes 21 months longer than this."

We've just had a classic example of this with Commissar Hewitt's dithering on the Barts PFI deal, which is reckoned to have added £35m to the £1.1 bn cost. Elsewhere, the CBI estimate that NHS bureaucracy and indecision added at least £100m to the cost of the 40 hospital projects they examined.

And then of course, there are all those cases of PFI deals where the private partner has made big gains by refinancing the project post-construction. According to last week's National Audit Office Report, total refinancing gains so far amount to £400m, of which only £137m have been shared with the taxpayer.

In principle, such gains are a reward for the successful management of delivery risk. Once the risk of construction overspend has gone, the future stream of income from the public sector user (say a hospital trust) is relatively low risk. So it's more valuable to investors.

But in practice, much of these gains has come about because the public sector partner, as so often, simply agreed to pay far too much for the facilities in the first place.

Are we getting value for money? Remember what the Public Accounts Committee concluded:
  • Departments need to get better at procuring and managing contracts
  • To justify PFI departments have relied too heavily on public sector comparators. These have often been used incorrectly as a pass or fail test; have been given a spurious precision which is not justified by the uncertainties involved in their calculation; or have been manipulated to get the desired result
  • The taxpayer is not always getting the best deal from PFI contracts because good procurement practice is not being followed. We have seen examples where competitive tension is not maintained; where there is only one bidder for the contract; or where the contractor raises the price after becoming the preferred bidder
  • Departments are too willing to bail out PFI contractors who get into trouble. The taxpayer must not be expected to pick up the tab whenever a deal goes wrong

All of which says one thing: the answer is no. The bottom line is that while the idea has much to commend it in theory, in practice the public sector's lack of commercial skills make it highly likely the taxpayer gets ripped off.

As we've argued before, we taxpayers would get a much better deal if we had control of our own purchasing decisions, rather than having our inept and costly public sector intermediating itself all the time.

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