Government announces long-awaited shake-up of PFI system

The Government has unveiled a major shake-up of the controversial PFI estates procurement model in an effort to make contracts cheaper, most flexible and more transparent.

The announcement by Chancellor, George Osborne, promises a thorough review of the current system, which has been heavily criticised for leaving hospital trusts and other public sector organisations with massive long-term bills they cannot afford to pay.

We've learnt that when risk is shared equitably between all parties involved in construction, you get more innovation

Osborne said: “The Government is committed to continuing sustainable investment in the assets we need to deliver public services, including our hospitals. However, we need to ensure that this investment is cost effective and that the taxpayer is getting maximum value for money. The Government shares some of the commonly-identified concerns that PFI contracts can be too costly, inflexible and opaque.”

The coalition abolished PFI credits during its Spending Review in 2010 in order to create a level playing field for all forms of public procurement. It also introduced new assurance and approval arrangements in April this year to strengthen the scrutiny given in the approval process of all projects, including those using private finance.

Then, in July, the Government published, for the first time, the unaudited Whole of Government Accounts, which included an assessment of PFI liabilities, and announced a plan to deliver £1.5billion worth of savings from the existing stock of PFI contracts in England.

In order to bring about change, I am announcing the Government’s intention to conduct a broad-based engagement process with interested parties, led by the Treasury, to bring forward proposals for a new approach in using the public sector in the delivery of public assets

 

Now it will be carrying out a much more indepth review, aiming to create a new PFI model that:

• Is less expensive and uses private sector innovation to deliver services more cost effectively
• Is able to access a wider range of financing sources including encouraging a stronger role to be played by pension fund investment
• Strikes a better balance between risk and reward to the private sector
• Provides greater flexibility to accommodate changing public service needs over time
• Maintains the incentive on the private sector to deliver capital projects to time and to budget and to take performance risk on the delivery of services
• Gives greater financial transparency at all levels of the project so the public sector is confident it is getting what it paid for, and the taxpayer is sure they are getting a fair deal now, and over the longer term

 

Announcing the review, Osborne said: “In order to bring about change, I am announcing the Government’s intention to conduct a broad-based engagement process with interested parties, led by the Treasury, to bring forward proposals for a new approach in using the public sector in the delivery of public assets.

 

In one sense PFI, in its purest form is dead. However, the Government still needs to invest in infrastructure and requires private sector delivery and capital to achieve that

“In considering what the future model should be it will be important to learn from the past and make full use of the wealth of experience that exists across the public and private sectors and internationally. Where PFI has been successful in getting projects delivered to time and to budget and creating the correct disciplines and incentive on the private sector to effectively manage risk, we will look to retain those benefits.”

 

The Government will launch a call for evidence on 1 December that aims to capture the learning and lessons from the last 20 years of PFI.

 

Osborne said: “Those lessons will inform the development of a new model that addresses the concerns of PFI. We invite those across the private and public sector that have strong ideas on how the future model should work to come forward with proposals and contribute to the development of a new delivery model.”

 

While critics welcome any move that will improve transparency and stop public organisations from being saddled with hefty debts that far outweigh the initial cost of a project, they are warning the Government not to drag its heels.

 

An infrastructure legal expert from law firm, Herbert Smith, said: “In one sense PFI, in its purest form is dead. However, the Government still needs to invest in infrastructure and requires private sector delivery and capital to achieve that. A concern is the extent to which this review will create a hiatus in investment at a time when that investment is badly needed as an agent and facilitator of economic growth.”

 

Where PFI has been successful in getting projects delivered to time and to budget and creating the correct disciplines and incentive on the private sector to effectively manage risk, we will look to retain those benefits

 

Currently there are around 105 PFI deals signed with NHS trusts with a combined value of around £11.5billion. With contracts covering typically around 30 years, the NHS will pay back more than £70billion on current projections. It is this huge mark-up that is causing criticism, particularly as the NHS is charged with saving billions from its budget over the next few years.

 

The bills are proving such a headache for some trusts that Health Secretary, Andrew Lansley, recently claimed 22 health trusts faced financial collapse unless a solution could be found.

 

Speaking in September, he said: “The truth is some hospitals have been landed with PFI deals they simply cannot afford. Tough solutions may be needed for these problems, but we will need to help the NHS overcome them.”

 

A concern is the extent to which this review will create a hiatus in investment at a time when that investment is badly needed as an agent and facilitator of economic growth

According to PFI expert, James Barlow, a professor of technology and innovation management at Imperial College London and director of the Health and Care Infrastructure Research and Innovation Centre (HaCIRIC), one of the key problems with the current system is the risk-sharing agreements.

 

He said: “We’ve learnt that when risk is shared equitably between all parties involved in construction, you get more innovation. In PFI, the NHS wanted the private consortiums to take all the risks, so new ideas were not being tried. This is a problem for an area where technology and practice are changing so rapidly that, for example, we may not need as many beds in 10 years as now.”