B.  Cost overruns

The Treasury Taskforce Technical Note No 5, How to construct a Public Sector Comparator highlights "...some dramatic cases of public procurement going wrong in terms of both time and cost overruns".50 Figures for the initial and final cost estimates of the highlighted projects are shown in the top half of table 6.

Table 6: Comparison of increases in public procurement and PFI project costs

£ million

Sources: Treasury Committee, The Private Finance Initiative , Supplementary memorandum from TUC, HC 147, 1999/2000, pp66. Treasury Taskforce, How to construct a Public Sector Comparator, Technical Note No 5

The figures show that the Trident submarine ship-lift and berth at Faslane in Scotland, Woodhill prison near Milton Keynes, and the Limehouse link in London overran their initial cost estimates by 214%, 31% and 106% respectively. The technical note also suggests that 'typical' overruns averaged 12% across a wide range of traditional procurement projects.51 The technical note suggests that the reasons for these overruns were that:

[…] public sector procurement has tended to be deficient in appreciating risk and, as a result, budgets for major procurement projects have sometimes been prone to optimism bias, ie a tendency to budget for the best possible (often lowest cost and earliest completion) outcome rather than the most likely. This has led to frequent cost and time overruns. Optimism bias has also meant inaccurate prices have been used to assess options. Such biased financial (ie price) information early in the budget process can result in real economic costs resulting from inefficient allocation of resources.

PFI projects themselves are no strangers to cost overruns as we can see from the lower half of table 6. Three PFI projects, the Norfolk and Norwich NHS Trust, the Greenwich Healthcare NHS Trust and the Benefits Agency - Computers have seen the final cost of the projects rise above initial cost estimates by 60%, 140% and 600% respectively. In other words, cost overruns can and do occur under both private sector and public sector management. The CBI have suggested that:

[…] this rise in cost is largely due to the Public Sector procurers changing their minds about what should be in the contract. The implication is that the rise in costs can be attributed to the extra capital investment and services which have been added to the contract because of this change of mind or, less benignly, because uncertainty is adding to the cost of the bid. 52

There is no indication that the specification of the traditionally procured schemes in table 6 changed between the initial estimate of cost and delivery of the project. However, in its report in 1996 the Treasury Committee made the point that:

There is no a priori reason why public procurement should not run to time and cost. Indeed many of the assumed benefits of PFI would appear to be available to better-managed and controlled conventional procurement.53

The PFI should reduce the burden on the public sector from the risk of cost overruns, provided the original contract stipulates that this risk should be transferred to the private sector contractor, thereby introducing incentives to avoid such problems.

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50  Treasury Taskforce, How to construct a Public Sector Comparator, Technical Note No 5, OGC web site as at 13 December 2001: www.ogc.gov.uk/pfi/series_3/technote5/5tech_contents.html

51  Original source: CUP, Government Procurement -Progress Report to the Prime Minister, 1995-96

52  Treasury  Committee, The Private Finance Initiative, Supplementary memorandum from TUC,HC 147 1999/2000, pp66.

53  Treasury Committee, The Private Finance Initiative, HC 146 1995/1996, para 33.