Friday, August 19, 2011

PFI - we did tell you at the time. 

The Treasury Select Committee has published the report of its inquiry into PFI, available. Many of the Committee's concerns echo those raised in the BMA's written evidence to the inquiry, particularly around the inflexibility and lack of value for money of PFI projects. A summary of the key points is below, prepared by the BMA's HPERU unit.

  • Analysis undertaken by the Committee’s Specialist Adviser suggests that, all else being equal, paying off a PFI debt of £1bn may cost the same as paying off government debt of £1.7bn. This would mean that a 70 percent increase in investment could be achieved for the same long term cost if government funding were used instead of private finance.
  • Allocating risk to the private sector is only worthwhile if it is better able to manage the risk and can pass on any subsequent savings to the client. The main benefit highlighted by PFI providers was the transfer of construction risk. However a PFI contract which lasts for 30 years is not necessary to transfer this risk.
  • In the area of design innovation and building quality there is some evidence to suggest that PFI performs less well than traditionally procured buildings.
  • The fixed nature of PFI contracts means they are likely to provide more certainty regarding price and time. However there is no convincing evidence to suggest that PFI projects are delivered more quickly and at a lower out-turn cost than projects using conventional procurement methods. On the contrary, the lengthy procurement process makes it likely that a PFI building will take longer to deliver, if the length of the whole process is considered.
  • PFI contracts are inherently inflexible. There is little evidence of the benefits of PFI arrangements, but much evidence about the drawbacks, especially for NHS projects. The inflexibility of PFI means that any emergent problems or new demands on an asset cannot be efficiently resolved.
  • The Value for Money appraisal system is biased to favour PFI. Assuming that there will always be significant cost over-runs within the non-PFI option is one example of this bias. There is an incentive for both HM Treasury and public bodies to present PFI as the best value for money option as it is often the only avenue for investment in the face of limited departmental capital budgets
  • For too long PFI has been the ‘only game in town’ in some sectors which have not been provided with adequate capital budgets for their investment needs. This problem is likely to get worse in the future with capital budgets cut significantly at the Spending Review. If PFI is the only option for necessary capital expenditure then it will be used even if it is not value for money. A much–needed reappraisal of PFI needs to be accompanied by a similar reassessment of its effects on overall capital spending in the public sector
  • The price of finance is significantly higher with a PFI. The financial cost of repaying the capital investment of PFI investors is therefore considerably greater than the equivalent repayment of direct government investment. The Committee has not seen evidence to suggest that this inefficient method of financing has been offset by the perceived benefits of PFI from increased risk transfer. On the contrary there is evidence of the opposite. The Committee does not believe that PFI can be relied upon to provide good value for money without substantial reform.
  • Owing to the current high cost of project finance and other problems related to PFI, there are serious doubts about such widespread use of PFI. There are certain circumstances where PFI is likely to be particularly unsuitable, for example, where the future demand and usage of an asset is very uncertain and where it would be inefficient to transfer the related risks to the private sector.

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