Wednesday, May 03, 2006

The Unacceptable Face Of Government Procurement

It's not often I disagree with the generally excellent Chairman of the Public Accounts Committee, but I'm not altogether sure about his comments on the Norfolk and Norwich PFI refinancing.

As we know, when the NAO investigated this, they found that Octagon- the private sector consortium that built the hospital- made gains of £82m when the deal was refinanced with additional debt just two years after completion. In contrast the hospital trust received only £34m. The consortium's overall return was thereby boosted to 60% pa, while the trust is now locked into a 37 year contract with a potential £257m termination payment.

Like the PAC, we're also concerned by the poor value taxpayers have received from many PFI deals- as we blogged only last week. But the question is who's to blame?

Mr Leigh describes Octagon's actions as the "unacceptable face of capitalism" and says:

"Through simply borrowing more, the benefits to Octagon's investors have soared on re-financing to levels which are unacceptable even for an early PFI deals".

Hmm. It's certainly true the early deals were far too generously priced for investors, but who's to blame for that? For all the reasons we blogged previously, the public sector- from Brown and Blair down- were (and still are) desperately keen to force these deals through. Should we be surprised that some of the early "pathfinder" deals, like this one, were done on such extraordinarily juicy terms? Which terms can now of course be refinanced to lock in these gains (see earlier blogs).

But why are the private contractors to blame? From their perspective they were entering a new market, and bearing substantial delivery risks. As the FT reports, "John Laing, a member of the Octagon consortium lost £80m on the PFI contract for the National Physical Laboratory, a loss that contributed to the destruction of its construction arm". Of course they were going to promote their own interests.

Leigh is much closer to the money when he goes on: "It is hard to escape the conclusion that the staff managing the project were not up to the rough and tumble of negotiating re-financing proposals with the private sector."

We reckon that's spot on, and we also go along with his warning "My committee would not expect to see appearing before it another accounting officer defending what we believe to be the unacceptable face of capitalism."

And that's the real point: this is yet another example of incompetent public sector procurement. As we blogged here, the public sector is by far the biggest customer in Britain, spending around £175bn pa on procurement. Yet it often gets some of the worse deals imaginable (eg those new contracts with NHS staff).

What are suppliers meant to do? Oh, please Mr Global Pharma Company, please don't negotiate as you would with anybody else, because our officials are all wankers.

Come on Edward- direct your fire where it's due.

PS Iain Dale brings his local Norfolk knowledge to bear on this: see this interesting post about conflicted fenmen.


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