HM TREASURY: MAKING CHANGES IN OPERATIONAL PFI PROJECTS

HM TREASURY: MAKING CHANGES IN OPERATIONAL PFI PROJECTS

Publication of the Committee's 36th Report, Session 2007-08

Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:

“Whether a PFI contract constitutes good value for money for the taxpayer depends not only on the terms of the deal originally struck with the private sector, but also on how well that contract is subsequently managed by the public sector authorities over the next 25 to 30 years.

“The evidence is that many public sector authorities are not doing a good job of managing operational PFI deals. Many contract managers do not have enough commercial expertise and the management of the contract is frequently not sufficiently resourced. An NAO survey has revealed that more than 15 per cent of the PFI projects examined are not being managed on a full-time basis.

“This is particularly worrying where changes are being made to the services and assets provided, at a cost to the taxpayer in 2006 of £180 million.

“Public sector authorities must keep the incumbent private sector contractors on their toes by, wherever appropriate, making proposed changes costing over £100,000 subject to competition. The authorities should refuse demands by the private sector to pay unjustified additional fees for processing change requests. And the public sector needs centrally provided guidance on what prices are reasonable for common minor changes to projects.”

Mr Leigh was speaking as the Committee published its 36th Report of this Session which examined the staffing and management of changes, the reasons for not putting larger changes out to competitive tender, the charging of management fees by Special Purpose Vehicles (SPVs) and the value for money of small changes, the cost of which varies substantially for similar work.

Under the Private Finance Initiative (PFI), the public sector enters into a long-term contractual arrangement with private sector companies to design, build, finance and operate an asset such as a hospital or school. There are now over 500 operational projects with a combined capital value of £57 billion and future payments amount to £181 billion (a present value of £100 billion).

It is inevitable, over the course of 25 to 30 years of operation, that changes will be needed to the services and assets provided under operational PFI projects. In 2006, some £180 million was spent on changes, but there were large variations in the extent of management resource both for PFI contracts of a similar size and for making changes of the same cost. Furthermore, a third of contract managers at PFI hospitals and one in six contract managers of PFI schools surveyed by the National Audit Office described their teams as under-resourced, and 15% of PFI projects were not being managed on a full time basis, which is a clear risk to value for money.

Major changes costing £100,000 or more accounted for 90% of the total value of changes to PFI projects in 2006. Nearly 30% of major changes which could have been competitively tendered, were not.

The companies involved in a PFI deal establish a separate company, known as a Special Purpose Vehicle (SPV), to manage the project, including any competitive tendering for new work. For most small changes, SPVs simply act as conduits, passing requests for changes from the public sector authority to the facilities management provider and back again. However, many SPVs charge additional management fees for processing change requests. These fees have ranged from 2% to 25%, adding an estimated £6 million to the cost of changes made in 2006.

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