The recent release (15 July 2003) of the HM Treasury report on the progress of PFIs and their future role in the delivery of the Governments investment plans for the public services emphasised the positive aspects of PFIs and also suggested some areas where changes could be beneficial.

The proposed policy has effect in England only, as the PFI policy function is devolved in Scotland, Wales, and Northern Ireland.

The change that the document will bring most notably include:

1. The end of procurement of projects less than £20 million.
2. The end of procurement of IT projects.
3. The introduction of  pilot projects to test a new Credit Guarantee Finance regime.

Smaller PFI projects

The Report claims that the smaller PFI projects, while delivering many of the benefits of the larger PFI projects, derive a diminished overall benefit because of the high transaction costs in relation to the perceived benefits of the projects.

The Treasury does not intend to take away PFI credits that have already been allocated and there will also be investigation into the potential for new methods of financing the projects, for example, through “framework funding” for small PFI schemes bundled together.

PFI IT projects

The Government will no longer use PFI funding to invest in public sector IT projects. A survey quoted in the report suggests that only 22 per cent of past projects delivered over 80 per cent of their defined programme benefits.

In terms of the research carried out by the Treasury, a sample of 16 public sector projects showed that 75 per cent of these fulfilled or exceeded their users' expectations. However, only a fifth of projects actually delivered 80 -100 per cent of the benefits they were initially expected to deliver.

The Report concluded that IT PFI may not be able to consistently offer value for money benefits. In particular many aspects central to IT procurement do not fit well with the central requirements of PFI.

The report confirms that the best performing projects were those that renegotiated their contracts after signature to obtain greater ongoing flexibility and looser output specifications, moving away from the PFI model. The use of PFI is particularly difficult in connection with IT because of the fast moving nature of the industry and its technology, the short life span of its products, and the fact that IT investment is dominated more by running costs than huge capital investments. All of these factors create problems in defining the investment right at the start. Another difficulty is the fact that IT systems are integrated into other business systems to such a degree that it is very hard to define areas of responsibility.

Finally, there is the practical problem of obtaining a true third-party investor. There is, according to the Treasury, no market for investment in IT PFI. The government has therefore decided to use conventional means of procurement for IT projects in the future.

Credit Guarantee Finance

The Report has looked cost of the private funding and while a study by PWC found the cost to be falling the report concluded that it might be paying an unnecessarily high price for the funding. So there are to be experiments with the issue of gilts to fund the senior debt on some projects.

A small number of pilot projects, that are expected to run for a period of nine months, are to be chosen to test. One of these being a pilot of how Credit Guaranteed Finance could be used with banks as the credit provider, a second will be an insurance company as a credit provider, and the Government The money would be guaranteed by the credit providers and the extra funding cost to the Government would be only the cost of the guarantee. The Treasury still asserts that under no circumstances they would it be guarantor of the loans.

The HM Treasury report also called for the introduction of reforms to improve the assessment of value for money appraisal by the public sector, to continue to ensure there is no bias in favour of any one procurement option and the decisions are made on the basis of best value for money. These include reforms to the Public Sector Comparator to ensure consistency with the reforms made at last year’s revision of the ‘Green Book’ (the Treasury’s guidance to departments on project appraisal). These changes mean that a value for money assessment of both PFI and conventional procurement options are fully taken into account prior to the procurement of a project, and that there is greater clarity on transferring soft services staff to ensure that application of value for money does not come at the expense of employee terms and conditions.  

Emphasis was also put on the measures to improve the efficiency of the procurement process, including more rigorous enforcement of standardisation, the accreditation of advisors, new models of procurement and greater transparency.

The proposals to revise the scope of PFI and focus its use on where it works best includes exploring new applications for PFI where existing evidence suggests it could deliver benefits. This was foreshadowed in the Chancellor’s Social Market Foundation speech earlier this year and area suggested are social housing, urban regeneration and waste.

In a press conference Paul Boateng, Chief Secretary to the Treasury said “The Government’s objective is deliver world class public services. To achieve this, sustained increased in investment and matching reforms are needed to deliver efficient and responsive public services. PFI has an important role to play in delivering this investment. Total investment will rise to more than £47 billion by 2005/6. PFI has accounted for between 10 and 14 per cent of total annual investment in public services since 1997. This year investment through PFI is expected to be around £4.6 billion.”

The document sets out details of research conducted by the Government, which confirms a largely positive impact of PFI to date, with 89 per cent of projects delivered on time or early and with the costs of signed deals only changing where the public sector’s requirements changed.

To date, the Government has closed 563 PFI deals with a total value of over £35 billion. Recent years have seen the steady growth of the market in PFI with projects in a wide range of sectors such as health, education, defence and housing, including 34 hospitals and 239 new or refurbished schools that are already up and running.IJ