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. For
example, one fund, Innisfree, has acquired interests in 24 hospital
projects. 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
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.
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
When pressed, the Department accepted that it would be possible
to try and renegotiate contracts to reduce costs.
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.
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.
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
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.
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.
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.
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
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.
15. In contrast the Department for Communities
and Local Government has found local authorities willing to cooperate
in providing data.
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.
The Department is still developing its data collection for operational
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.
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.
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.
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
17 Qq 17, 48; C&AG's report, The performance
and management of hospital PFI contracts, paragraphs 15, 3.30-3.31 Back
Q 10; http://www.innisfree.co.uk/projects.html - of the 24 projects,
seven are overseas and one in Scotland. The remaining 16 are English
NHS hospitals. Back
Q 59 Back
Qq 142-144 Back
Q 13 Back
Q 142 Back
Qq 27, 78 and 85 Back
C&AG's report, The performance and management of hospital
PFI contracts, paragraph 9 Back
Qq 74-75, 82 Back
Qq 54-56, 72-73 Back
Qq 58, 69 Back
Q 119 Back
Qq 90-92, 95 Back
Qq 118-119, 172; C&AG's report, The performance and management
of hospital PFI contracts, paragraph 17 and Figure 11 Notes Back
Qq 88-89 Back
Qq 15, 45 and 46 Back
Q 88 Back
Qq 50, 114-117 and 150 Back
C&AG's report, The performance and management of hospital
PFI contracts, paragraph 3.6 Back
Qq 114-117 Back
Qq 6, 97 Back