PFI in Housing and Hospitals - Public Accounts Committee Contents

2  Making savings in operational contracts

8.  Contractors and investors are often involved in multiple PFI projects which gives them the opportunity to drive efficiencies through effective management and economies of scale. There is an active market in the equity in PFI projects and some financial institutions have been buying interests in a large number of projects.[17] For example, one fund, Innisfree, has acquired interests in 24 hospital projects.[18] The price at which equity is traded would give an indicator of the current market value attached to PFI projects, but these trades are not tracked centrally.[19]

9.  With tight public spending constraints, central government is negotiating with major suppliers to secure better deals and reduce costs. However, the Department of Health has not used its buying power to negotiate with major PFI contractors and investors to secure a share of efficiency gains for the tax-payer. This approach has been successful in the past to secure a public sector share of gains from refinancing contracts even though there was no contractual obligation for such gains to be shared.[20]

10.  The Department argued that it was difficult to ask the private sector to share gains when sometimes they made losses and the public sector does not share in those. For example, one construction contractor had lost around £100 million on a hospital contract. The issue, however, is whether, in most cases, the private sector is making greater than expected profits without any gain sharing with the public sector. There is a lack of data on this issue but reports suggest that in some hospital projects the investors are receiving returns of ten times their initial investment.[21] When pressed, the Department accepted that it would be possible to try and renegotiate contracts to reduce costs.[22]

11.  Hospital PFI contracts may include support services such as cleaning, catering and portering. These services are usually tested every five years in order to ensure that prices reflect the market. Trusts may not always report the results of this regular testing to the Department of Health but the Department told us that rates had reduced in all the exercises in 2010 that it knew about. Trusts may also choose to change providers or take services back in-house at this stage.[23] The costs of delivering these services through PFI are, on average, broadly similar to those in non-PFI hospitals, although there are wide and unexplained variations between individual hospitals.[24] The choice as to whether to include these services in PFI contracts is left to Trusts and we were told that most recent contracts exclude them. The Department has not undertaken any evaluation to identify the merits of either including or excluding these services.[25]

12.  One of the stated benefits of PFI is that it should ensure buildings are maintained to a high standard through the contracts' lives, yet 20% of Trusts were not satisfied with the maintenance service provided within their PFI contracts. In addition, unlike support services, the costs of maintenance cannot be revisited and are not subject to regular benchmarking.[26] The Department of Health had not addressed this issue. It had been unsure about the viability of negotiating lower maintenance costs, Trusts had not been very supportive of such action and the Department had consequently not taken up the matter with suppliers.[27]

13.  Central departments are best placed to collect and distribute benchmarking data that can be used to understand individual project costs relative to others projects and help local delivery bodies manage their contracts effectively. The quality of data within Whitehall is a systemic problem identified in numerous hearings of this Committee. [28]

14.  The Department of Health told us that it cannot compel Trusts, especially Foundation Trusts, to engage with the support it offers and that about 40% of Trusts do not routinely engage.[29] All Trusts, including Foundation Trusts, are required to provide data on the size and cost of their estates using a system known as the Estates Return Information Collection (ERIC). However this does not include PFI-specific information and concerns over data quality, and the fact that since 2007-08 data has only been collected at a Trust rather than an individual hospital level, mean that this data is not appropriate for benchmarking the costs of PFI contracts. The Department has not taken steps to address this.[30]

15.  In contrast the Department for Communities and Local Government has found local authorities willing to cooperate in providing data.[31] However, in the past it has not collected sufficient data to evaluate the programme and monitor performance. The Department has introduced new mandatory proformas which should provide more systematic and comparable data enabling it to control cost increases and compare PFI to other procurement options.[32] The Department is still developing its data collection for operational projects.[33]

16.  The procurement and management of PFI projects requires there to be sufficient capacity in both central departments and local delivery bodies. The Department of Health has a team of only four people to support Trusts with operational PFI contracts and there is uncertainty about the future of this team.[34] In addition, 36 % of Trusts have less than one full time person managing their PFI contract and a further 12% do not have anyone spending at least a day a week managing their contract.[35] The Department welcomed the National Audit Office recommendation to form a "PFI club" whereby Trusts would receive the benefits of central support and in return would provide benchmarking data. The club has yet to be implemented but the Department proposes to ask NHS Trusts to contribute financially to such a club so that support could be commissioned to cover for any shortfall in support the Department is able to provide.[36]

17.  The Department for Communities and Local Government and the Homes and Communities Agency oversee a number of housing projects that are still in procurement and between them have a team of 11 staff. The Department has also introduced additional support to some local authorities via 'transactors' - a flexible team of people with commercial expertise. The Department told us that it would maintain this capacity for as long as it is needed.[37]

17   Qq 17, 48; C&AG's report, The performance and management of hospital PFI contracts, paragraphs 15, 3.30-3.31 Back

18   Q 10; - of the 24 projects, seven are overseas and one in Scotland. The remaining 16 are English NHS hospitals.  Back

19   Q 59 Back

20   Qq 142-144 Back

21   Q 13 Back

22   Q 142 Back

23   Qq 27, 78 and 85 Back

24   C&AG's report, The performance and management of hospital PFI contracts, paragraph 9 Back

25   Qq 74-75, 82 Back

26   Qq 54-56, 72-73 Back

27   Qq 58, 69 Back

28   Q 119 Back

29   Qq 90-92, 95 Back

30   Qq 118-119, 172; C&AG's report, The performance and management of hospital PFI contracts, paragraph 17 and Figure 11 Notes Back

31   Qq 88-89 Back

32   Qq 15, 45 and 46 Back

33   Q 88 Back

34   Qq 50, 114-117 and 150 Back

35   C&AG's report, The performance and management of hospital PFI contracts, paragraph 3.6 Back

36   Qq 114-117 Back

37   Qq 6, 97 Back

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