Letter and memorandum by Mr David Belton,
Sheffield City Council
1. How should the cost and benefits of Private
Finance projects be assessed? What discount rate should be used
in comparing Private Finance with conventional public procurement?
Are current procurement procedures satisfactory? Is enough information
disclosed on Private Finance projects fully to assess whether
the taxpayer is getting value-for-money?
We would expect any project to be assessed by
options appraisal in the first instance to establish whether the
scheme would deliver any benefits.
Having established a need, we would expect any
further appraisal to be based on a whole-life comparison to take
account of residual values of any assets involved.
Typically projects with the characteristics
of delivering and/or maintaining new infrastructure eg buildings
or services will be capable of alternative ways of provision,
one of which would be PFI. We would look to compare:
Local authority funding-prudential borrowing
Central government loan funds.
The focus of existing value for money (VfM)
tests is on VfM for the authority. If using central government
loan funds this test needs to relate also to VfM for the public
sector more generally.
It follows that the discount rate for use in
"conventional public procurement" should be that at
which the funds are procured eg if central funds then the long
term treasury borrowing rate or if locally funded via prudential
borrowing then PWLB.
We believe that current procurement procedures
are generally good but often lock in (or out) funders at too early
a stage so recent Treasury guidance will allow more bidder competition
on funding and for options to be kept open until much closer to
VfM is both an absolute and relative term. Current
tests against an alternative option, along with scenario testing,
provide an indicator of relative VfM.
How can we be sure however that the proposal
is absolutely the best VfM?
2. How does the performance (eg, cost, delivery
dates and service quality) of schools, hospitals, prisons, roads
and other projects operated under private finance compare to those
which were traditionally procured?
The best contemporary comparison of assets provide
by either method is that of schools provided under the BSF programme.
Here it would be true to say that the standards and performance
are similar. That however is heavily influenced by the LEP structure
where the procurement process and negotiation is being handled
by a single agency on the authority's behalf.
Away from that structure PFI brings contractual
standards of asset construction and services delivery that when
provided "conventionally" requires joined up and consistent
thinking by the authority's financial officers, schools' management
and indeed schools' heads. This introduces scope for flexibility
which can be a good thing but can also to a degree lead to local
changes eg school heads having their own priorities.
3. Is there significant risk transfer to
the private sector or is it more apparent than real?
All the risks associated with the construction
delivery of the asset to time, of variation of funding costs over
time, and of operating expenses can be effectively transferred
to the private sector under PFI (at a cost).
An issue with certain types of PFI eg schools
is that the client has to accept and manage the demand side risk.
Therefore risk not fully transferred.
An emerging issue is that of PFI contracts with
fixed price or inflation linked contracts in a public sector funding
environment where standstills or even cuts are going to be possible.
Non PFI arrangements may be easier to manage down in such an environment.
4. How effective and costly has it been to
monitor the private sector providers' performance and quality
of service in Private Finance projects in comparison with traditional
Traditionally procured assets require an in
house management structure and capability to ensure provision
of a satisfactory service. Under PFI much of this responsibility
is carried by the provider and governed under the performance
requirements of the contract.
This authority has recognised that contracts
do not manage themselves and has made financial and organisational
provision for effective contract management to be in place.
We are in the process then of developing this
to ensure that we secure "benefits realisation".
5. When the basis of a Private Finance contract
needs to be altered post procurement because of changing client
needsfor example, a bigger jail is required due to a larger
than expected prison populationhas this proved problematic
compared to projects under traditional procurement? What has been
the experience of PFI projects that have reverted to the public
PFI contracts are inherently inflexible for
major changes, despite contract procedures for contract variation.
The challenge eg of adding a major school extension
mid way through a 25 year concession is considerable eg costs
of a legal variation, funding environment, term of the new contract,
private sector opportunity for profit generation.
(We have no PFI projects that have reverted
to the public sector).
6. How should future payments by the Government
under existing Private Finance contracts be recorded in public
sector accounts? Is risk transfer an appropriate test? Should
all such liabilities be included in the national debt? Should
they be accounted for separately from government debt? How much
does the public sector accounting treatment of capital and revenue
aspects of projects matter?
Where assets are involved then under private
sector accounting the key determinant of whether a lease should
be capitalised is whether ownership passes to the client at the
end of the term. (Finance Lease) It seems to me that irregardless
of the debate about "risk transfer" and "control"
this should be the key decider on whether a contract or the asset
provision element thereof should be capitalised along with the
associated debt stream.
After all, the authority does have the long
term debt liability in respect of an asset which it is enjoying
and will in the long run retain.
To the extent that assets are not involved (and
therefore) cannot be capitalised (operating lease), the long term
liability should remain off balance sheet.
7. Would public sector investment in the
last decade have been lower without Private Finance? If so, by
In this authority we have been able through
PFI to invest £190 million in Capital schemes (schools and
an office building) that would not otherwise have been possible.
8. How much impact has the financial crisis
had on launching new Private Finance projects? Is the crisis likely
to have a permanent effect on the Private Finance market?
This is having no impact on our programmes,
although it is requiring close monitoring under our Highways PFI
project which is in procurement.
The "crisis" itself won't have a permanent
effect but changes in funders' appetite for business and terms
of funding may have a longer term effect.
9. Are there realistic alternative roles
for private finance than the current PFI-type private finance
models? Should the UK be aiming for more diversity in private
finance models? Would a national infrastructure bank (such as
the proposed Dodd-Hagel NIB in the US) add any value in the UK?
Should the public sector have a more hands-on role in financing
Yes a national infrastructure bank would help
provide affordable finance of a suitable scale for PFI projects.
We recognise however that this will de facto
mean the debt will go on national accounts.
Under turnkey PFI frameworks for certain types
of infrastructure the private sector remains the best option operationally
and we would not envisage an argument for the public sector to
"get more hands-on".
10. Is there an optimal mix between conventional
public procurement and Private Finance for public sector investment?
What is the long run role of private finance in the delivery of
infrastructure both in the UK and globally?
Over the long run private finance should provide
a competitive market for funds, using structured products, capable
of delivery in an administratively commercial and efficient way.
Public finances may be cheaper( to reflect AAA rating and longevity
of the lender) but will not benefit from the same commercial tension,
or be product-geared to the types of funding structure needed,
and will be heavy on governance and administration.
Direct government funding will also appear on
Where PFI also scores is in the integration
of the funding arrangement with a long term operating concession.
The large players/providers will continue to
provide a VfM solution to these turnkey requirements.
25 September 2009