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UK government targets £1.5bn of PFI savings

Having used several Private Finance Initiative (PFI) schemes as test cases, the UK’s Treasury now believes it can achieve £1.5bn of savings from the 495 PFI projects operational in England. The government has been fiercely critical of the costs of such schemes.

Lord Sassoon, the commercial secretary to the Treasury, has unveiled a plan to deliver £1.5 billion (€1.7 billion; $2.4 billion) of savings from 495 operational Private Finance Initiative (PFI) projects in England. The savings will be “recycled back into frontline services” by the contracting authority.

The belief that significant savings can be made follows several “pilot projects” which, in the government’s view, confirmed that savings of around 5 percent of annual payments could be made. The pilots were: the Queen’s Hospital PFI in Romford, Essex; the Corsham, Wiltshire defence PFI; and the Welbeck Defence Sixth Form College PFI in Leicestershire.

The Cabinet Office’s Efficiency and Reform Group, supported by the Treasury and Local Partnerships (a Local Government Association/Treasury joint venture), will lead the programme to secure the savings. 

A statement issued by the Treasury identified the three areas for savings as follows: effective management of contracts, for example through reducing wasteful energy consumption and the public sector sharing in insurance savings; making efficient use of space, for example by sub-letting or mothballing surplus building space; and reviewing soft service requirements so the public sector does not buy more facilities management services (such as window cleaning) than it needs.

In the statement, the government said it had already taken “signficant steps” to improve the cost effectiveness and transparency of PFI, including: the abolition of PFI credits to create a level playing field for all forms of procurement; new guidance to government departments to strengthen approval processes for all projects; and the inclusion this month, for the first time, of PFI liabilities in the unaudited Whole of Government Accounts (a consolidated set of financial statements for the UK public sector).

“We are determined to reform PFI contracts to protect the taxpayer,” said UK chancellor George Osborne in the statement. “Today’s announcement, to find savings of £1.5 billion, is one of a number of ambitious steps to secure better value for money in PFI contracts.”

PFI, the UK’s standard procurement process for tendering public works to the private sector, was introduced by the Conservatives but blossomed under Tony Blair’s New Labour government. Having inherited a plethora of such schemes from the previous administration, members of the Conservative/Liberal Democrat coalition have been extremely critical of them. Notably, in February this year, Cabinet Office minister Francis Maude said many PFI deals were “ghastly”.

Earlier this month, the UK’s Public Accounts Committee – Parliament’s public spending watchdog – challenged the heads of infrastructure funds Innisfree and Semperian about whether private funds would accept retroactive cuts to contractually agreed returns for privately financed infrastructure projects. Such a “haircut” was rejected by the fund managers, although there was a suggestion that they might be open to sharing profits from the sale of equity in projects.