The Private Finance Initiative (PFI) is being used to procure many projects involving the construction of assets which are needed to deliver public services. Central government projects include hospitals, roads, prisons and government buildings. The Office of Government Commerce (OGC) has central responsibility for promoting good practice in public sector construction projects. Until 1 April 2003 it also had responsibility for the development of PFI policy. That responsibility now rests with the Treasury.
On the basis of a Report by the Comptroller and Auditor General the Committee took evidence from the OGC and the Construction Industry Council (CIC) on the extent to which the PFI was delivering greater certainty to departments, the relationship between the returns the private sector earn from PFI construction projects and the risks they actually bear, the extent to which there are alternatives to using the PFI, and whether departments are maintaining value for money where they require additional work during the contract period.
Our key conclusions are:
- The PFI is delivering greater certainty on the timing and on the cost to departments of their construction projects. Greater certainty in the delivery of a built asset is an important benefit likely to arise from use of the PFI approach that needs to be assessed in each case alongside all the other benefits, costs and risks of PFI to determine overall value for money.
- There is a lack of transparency as to whether the total returns which construction companies derive from PFI projects are reasonable in relation to the risks the companies are actually bearing. Construction companies seek greater returns from PFI projects compared to conventional procurement because they say they are bearing greater risks. There is, however, very little information available to show all the returns which construction companies will earn from PFI projects (including both fees for construction services and dividends on funds invested in the project company). And it is unclear whether the pricing of PFI deals reflect the steps that construction companies can take to reduce their risks through the checking process known as due diligence and by insuring risks.
- The PFI as a form of procurement should not be used without proper consideration of other options. The PFI is but one of three recommended procurement methods which aim to improve value for money through transferring risk to those best able to manage it and by improving the integration between parties involved in the construction process. The other recommended methods are Design and Build, and Prime Contracting. The PFI should only be used where it is the best of these options and not solely because capital budget constraints make it a convenient form of procurement.
- Departments need to pay very close attention to maintaining value for money throughout the PFI contract period. The NAO census identified that one in five public authorities had already asked for additions or changes to facilities within a few years of letting a PFI contract. Yet in less than half of these cases had the authority attempted to benchmark the resulting price change. A PFI consortium is in a strong position once a contract has been let because it is the contractual supplier for 30 years or more. It is essential that departments take steps to rigorously test any prices for additional work and to impose credible conditions that will allow them to have additional work carried out by alternative suppliers of their choice if there are doubts about value for money.