The use of private finance is becoming an important part of the way government delivers complex projects. The Commons public accounts committee has examined these deals to fi nd out what has gone right and, equally important, what has gone wrong. Some invaluable lessons have emerged.
First, the good news. Private fi nce has helped deliver projects such as hospitals and schools with greater certainly about deadlines and better control of costs than the government achieved using conventional procurement practices.
This is mainly because in Private Finance Initiative (PFI) contracts the private sector does not get paid until the new asset has been delivered and is working as the contract stipulated. The committee has, nevertheless, found areas of concern and there are important issues that the public sector needs to address if these projects are to deliver value for money in the long term.
The first is a lack of sufficient planning at the outset about the nature of the project and the likely costs. This failing is not unique to PFI. We see public offi als repeatedly failing to give enough thought at the outset to the complexities and likely costs of projects they are planning, particularly where the project is large or has very technical requirements.
In the past year the committee has been critical of the cancellation of the ambitious Paddington Health campus where the proposed worldclass healthcare project collapsed after five years at a cost of £15M to the taxpayer without coming to the market. We also heard about the termination of the contract for the National Physical Laboratory (see News) where the private sector parties underestimated the complexity of the project, causing delays of five to six years in the delivery of the new buildings.
Another concern is the ability of the private sector to achieve large financial returns for investors, within a few years of contract letting, through the process of refinancing the contracts under improved terms.
An extreme example of this was Norfolk & Norwich University Hospital where the rate of return to investors soared from 19% to 60% following refinancing.
As a result of pressure from the committee, refinancing gains must now be shared with the government, but this still leaves the private sector with the capacity to earn substantial benefits. There are also concerns surrounding the long-term nature of the contracts and how well they adapt to government's changing requirements. We will also want to see whether contracts will be able to deliver the changes required while maintaining value for money for the taxpayer.
There is also trend for initial investors in PFI projects to sell their shares on to other investors. We want to be reassured that this does not affect the delivery of the underlying service to the public.
PFI deals are by their very nature long and complex. The Committee will continue to monitor them to make sure that past lessons are put into practice and future ones disseminated.
Edward Leigh MP is chairman of the Commons public accounts committee