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Treasury launches pilot to achieve savings in PFI projects

The Treasury has launched a pilot project that aims to achieve savings in operational Private Finance Initiative (PFI) contracts.

The first project to be examined will be the contract for the Queen’s Hospital in Romford, where the Treasury says an experienced team of commercial, legal and technical advisors to identify ways of reducing ongoing costs in this contract on behalf of the local Barking, Havering and Redbridge University Hospitals NHS Trust.

The lessons will then be used to drive savings across the full portfolio of PFI contracts, on which the public sector will spend more than £8bn on in 2011-12, as part of the Government’s plans to tackle the £148.5bn budget deficit.

Commercial Secretary to the Treasury Lord Sassoon said: “PFI contracts are not immune from savings. The launch of this pilot, along with our next round of engagement with industry on a PFI code of conduct, indicates our determination to drive out costs while ensuring front line services are maintained.

“It is critical that Government urgently addresses every opportunity for savings across all contracts, no matter how complex they may be. We owe it to the taxpayer to eliminate wasteful practice and gold plating in contracts.”

The purpose of the pilot is to identify the nature and level, both of savings and improved contract flexibility, that could be achieved in other accommodation based PFI projects.

The Queen’s Hospital PFI project was signed in January 2004 and has a remaining contract value of £835M. Results from the pilot will be provided to ministers in the spring.

It is intended that the pilot will encourage contract managers to look across PFI projects for savings in areas such as contract and asset management and identifying where additional costs are being incurred for unnecessary service levels.

Minister for the Cabinet Office, Francis Maude said: “As part of the recommendations arising from Sir Philip Green’s Efficiency Review this is the first of a number of pilot reviews of large contracts – including PFI contracts – with over £100M remaining contract value. This pilot review will produce specific recommendations, looking particularly at how it can be made more efficient, flexible and cost effective as well as provide a replicable process which can be rolled-out to other relevant contracts.”

The Treasury published draft guidance on how to make savings in operational PFI contracts in January. This guidance, aimed at public sector contract mangers, intends to help them identify and implement savings measures in their own contracts, reducing costs while maintaining frontline services.  The guidance will be revised following completion of the pilot.

The Government has also said that it continues to seek a voluntary code of conduct with industry – investors, contractors and lenders – to ensure their positive engagement in reducing the cost of contracts and addressing issues across sectors such as agreement to updating older contractual provisions and enhancing transparency of financial reporting.

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