PFI in Housing and Hospitals - Public Accounts Committee Contents

1  Value for money of the hospitals and housing PFI programmes

1.  Many PFI projects are procured by local bodies, such as NHS Trusts and local authorities, who are the signatories to the contracts and are responsible for day to day contract management. Central government departments are responsible for managing the portfolios of projects, supporting projects to maximise value for money over the lives of the contracts and providing assurance to Parliament on expenditure and value for money. We took evidence at a single hearing, based on two National Audit Office reports - on the operational phase of PFI hospitals, and on the procurement phase of PFI housing - in order to look at the PFI process in a broader context.[2]

2.  As of April 2009 there were 76 operational PFI hospital contracts with a capital value of £6 billion. In addition there are a small number of projects in procurement.[3] Over the past ten years PFI has been the major procurement route for major health infrastructure projects. The Department of Health told us that in 1999-2000 the then Secretary of State had said "PFI is the only game in town".[4]

3.  By contrast the Department for Communities and Local Government has made more limited use of PFI for social housing. The Department told us that PFI has accounted for only 2% of investment in social housing where it sits alongside a number of other investment routes.[5] By April 2009 there were 25 signed PFI housing projects which had built or refurbished over 13,000 homes.[6] Together with projects currently in procurement the Department told us that PFI housing projects have a capital value of £2.8 billion, which excludes projects worth £1.8 billion for which funding is no longer guaranteed following the recent Spending Review. It is currently reviewing these projects with local authorities to consider different funding options.[7]

4.  We questioned the two Departments about the circumstances in which they felt PFI was value for money. The Department of Health believes that at a portfolio level there has been no difference between PFI and ordinary public procurements in terms of value for money, but that PFI has enabled many more hospitals to be built that would otherwise have been the case.[8] The Department for Communities and Local Government told us that PFI works best for delivering significant transformational change in areas of high deprivation but works less well for straightforward refurbishment schemes.[9]

5.  It is hard to get a definitive picture of when PFI is value for money without robust evaluation. The Department for Communities and Local Government has undertaken a limited analysis of capital costs on new build schemes but this did not take account of all project costs such as finance costs. The Department was undertaking a programme level comparison exercise which was due to conclude in December 2010.[10]

6.  To be approved, PFI projects should be assessed as being value for money compared to other funding options. This usually involves comparison to a theoretical model called the public sector comparator. The Department of Health noted that in some cases PFI deals went ahead with the PFI option marginally more expensive than the public sector comparator.[11] As comparators involve estimation a marginal difference is not significant, but we are concerned, given that other funding options were not realistically available, that business cases may have failed to challenge sufficiently the choice of PFI as the procurement route. The National Audit Office also reported that local authorities frequently cited PFI as the only realistic route to secure funding for some housing schemes.[12]

7.  Value for money is called into question if projects are consistently late or over-budget. The housing projects signed to date have cost significantly more than originally planned with 12 projects seeing increases over 100%. In addition projects have on average been signed two and half years late.[13] The Department for Communities and Local Government told us that insufficient time was invested in the beginning of the process for early schemes. For example project teams did not have a good understanding of the condition of existing housing stock.[14] The Department for Communities and Local Government now spends more time evaluating projects at an early stage and told us that only one project has seen a cost increase since 2006, although some projects may need to reduce their scope to stay within budget in future. [15] On hospitals, most PFI hospital contracts, once operational, are well managed and achieving the value for money expected at the point contracts were signed; but there is no evidence that including operational support services in a PFI contract is better or worse value for money than managing them separately.[16]

2   C&AG's reports, PFI in housing, HC 71, 2010-2011 and The performance and management of hospital PFI contracts, HC 68, 2010-2011  Back

3   Q 129; C&AG's report, The performance and management of hospital PFI contracts, HC 68 2010-2011, paragraph 1.2 Back

4   Q 36 Back

5   Q 1 Back

6   C&AG's report, PFI in housing, Figure 1 Back

7   Qq 101-103, Ev 20 Back

8   Qq 7-8 Back

9   Qq 2, 159 Back

10   Qq 111, Q15 Back

11   Qq 25, 38-39 Back

12   C&AG's report, PFI in housing, paragraph 1.12 Back

13   Qq 97-99; C&AG's report, PFI in housing, paragraph 2.11 Back

14   Q 3 Back

15   C&AG's report, PFI in housing, paragraph 2.10 Back

16   C&AG's report, The performance and management of hospital PFI contracts, paragraph 18 Back

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Prepared 18 January 2011