Since its launch in 1992, the Private Finance Initiative (PFI) has become one of the main methods by which the public sector procures services from the private sector. More than 500 deals have now been signed with a total capital value of over £50 billion.
In 1999, after we had examined and reported on four of the early PFI deals, we issued a progress report on experience to date to help the public sector get the best possible deals for the taxpayer. Since then we have issued a further 18 reports on individual deals or cross-cuttings issues involving the PFI (Appendix 1). This report draws together the lessons learned from this work. Individual deals need to deliver value for money for taxpayers and users of services, and best practice needs to be applied more generally to safeguard the public interest.
We draw the following main conclusions from our examination:
· The PFI is an important method of procuring public services that has now become well established. It offers a number of potential advantages but there are also a number of potential drawbacks. The balance to be struck will depend on the circumstances of each case, and each proposed deal needs to be considered carefully on its merits. Whilst there are examples of good practice, our examination of a wide range of PFI deals shows that many departments need to get better at procuring and managing contracts. Best practice needs to be more widely adopted if the taxpayer is to reap the full benefits of the PFI approach.
· Successive administrations have adopted the policy of using the PFI for those cases where the approach is expected to deliver value for money. The Prime Minister said in September 2002 that the PFI has a central role to play in modernising the infrastructure of the NHSbut as an addition, not an alternative, to the public sector capital programme. Yet the PFI is too often seen as the only option. To justify the PFI option, 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. Before the PFI route is chosen departments need to examine all realistic alternatives and make a proper value for money assessment of the available choices.
· 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. Sound procurement procedures need to be applied to all purchases of goods and services, however they are financed. Departments need to get better at protecting the taxpayer's interests when negotiating PFI deals.
· Most PFI contracts are long-term deals of 25 years or more. Once deals have been signed, projects must be managed effectively so that the required services are delivered to an acceptable standard over the life of the contract. Effective management requires a partnership approach between departments and contractors, a proper system of rewards and penalties for good and bad performance, and satisfactory procedures for dealing with change.
· Departments are too willing to bail out PFI contractors who get into trouble. Contractors should expect to lose out when things go wrong just as they expect to be rewarded when projects are successful. Departments must ensure that PFI contracts safeguard the taxpayer's position in circumstances where the contractor is no longer able to deliver what is required under the contract. Departments should consider in advance how they will eventually exit from deals should this prove necessary and draw up contingency plans accordingly. When projects run into difficulties prompt action is necessary to prevent costs rising further. They taxpayer must not be expected to pick up the tab whenever a deal goes wrong.