“The case for using private finance in public procurement needs to be challenged more”. This was one of the key conclusions drawn by the UK’s National Audit Office (NAO) – the country’s public sector auditor – in a report published at the end of last week.
The report – entitled “Lessons from PFI and other projects” – said that, since the financial crisis, the cost rationale for using PFI had been eroded. It said that the “cost of debt finance has increased since the credit crisis by 20 percent to 33 percent” and added that “in the current climate, the use of private finance may not be as suitable for as many projects as it has been in the past”.
In a strident call for PFI to be put to one side where possible, the report said: “The NAO calls on the Treasury and departments to identify alternative methods for delivering infrastructure and related facilities services, building on the lessons learnt from PFI, to maximise value for money for government”.
The context is provided by the coalition government’s “value for money” agenda. The report said that improving the procurement process could help the government to achieve its aim of infrastructure delivery cost savings of between £2 billion (€2.2 billion; $3.3 billion) and £3 billion per year.
The NAO called for “independent challenge” to stop projects which do not give the prospect of value for money, calling for a collaborative scrutinising role to be played by the Major Projects Authority (MPA), the Treasury and government departments. The MPA was launched last month as a partnership between the Cabinet Office and Treasury designed to ensure that major government projects are delivered on time and budget.
The report made a recommendation that “periodic value for money reviews” should be held to highlight areas where value for money had diminished without “burdensome revisiting of all aspects” of project business cases.
The report noted that, under national accounting rules, privately financed projects would often still be off balance sheet, which “may continue to act as an incentive” to use PFI.
It also pointed to “insufficient data” to demonstrate whether private finance has led to better or worse value for money than other forms of procurement. Private financiers have tended to claim a better track record than the public sector in terms of delivering on time and budget – and point out that they are contractually bound to maintain a high level of performance.
The report called for the Treasury to consider “how data can be collected to better understand the relationship between investors’ returns and the risks they have borne”.