131. During the course of a private finance project contract, if a public body wants to close or change the use of part of a building (e.g. shut a hospital wing due to the local population size declining) under the terms of the contract it usually has to pay charges to the contractor.
132. Critics argue it is impossible to predict the type and quantity of future demand for public services. For example, the demands of a hospital will be different in 20 years given new and improved treatments and changes to the demographics of the local population. With a private finance contract requiring charges for adapting to these factors over time public authorities may be deterred from making the necessary changes.
133. Sir Peter Dixon cited the case of putting in day care facilities after the hospital had been built. These facilities had not been provided for in the original design due to a planning error before he took up his post. Rectifying this was "very expensive" because under the private finance contract the hospital was stuck with the one provider and could not get quotes from alternative contractors. "We had no ability to challenge the capital costs of our provider and of course they did it to suit them and we just had to cough up" (QQ 317-319).
134. Sir Peter Dixon believed that further big changes will be needed over the life of the hospital: "Inflexibility is an issue and there is no doubt that in 30 years time when this project comes to an end there will have been several reincarnations of the buildings" (Q 319).
135. But proponents of private finance argued that many of the costs involved in amending PFP contracts also arise under traditional procurement. Dr Stone said: "The vast majority of the costs of changes also exist in traditional procurement but are easier to hide where there is not a contract to renegotiate. The additional cost is a trade-off for transferring the risks for the long term condition of the infrastructure" (p 3). Under traditional procurement if, for example, the wing of a hospital was no longer needed, the costs of building it would have already been paid. Under PFPs not all the construction costs would have been paid for until the end of the 25-30 year contract. Partnerships UK noted that: "All sunk costs are inflexible and in that sense conventional procurement is as inflexible as PFI insofar as an asset no longer required still needs to be paid for" (p 188).
136. Others argued that the long-term nature of the contract and the associated costs helped ensure clearer specification of PFPs. Mr Allen said: "One of the principal causes of cost overruns on public procurements is the procuring authority changing its specification repeatedly. So the fact that within a PFI contract there are constraints on the public authority doing that, that has been one of the reasons why you have seen fewer cost overruns once the contracts have been let" (Q 378).
137. The PFP route can, however, lead to inflexibility at a high level of public policy decision making. Sir Peter Dixon said that not only did PFP contracts lead to inflexibility at the level of the individual hospital but that they also restricted changes to the broader health care system. If a hospital had to close in London, it was less likely to be a PFP one because of the charges involved. So the allocation of medical care within a given budget would not be driven by health needs alone: "Whatever else happens in reorganising services in central London my hospital has to stay there because it has a £43 million a year payment to a private provider. You can shut another hospital which does not have that and sell off the land, but you cannot do it with mine" (Q 324). The Institution of Civil Engineers feared the "lack of flexibility is a factor leading to a lack of resilience and flexibility in our infrastructure networks" (p 313).
138. Inflexibility has been a feature of private finance contracts, although it has also been a key factor in forcing the public sector to plan ahead. But flexibility is negotiable, at least to some extent. Public authorities should determine how much flexibility they want, the means of achieving it in the terms of the contract and what they are prepared to pay for it; then negotiate accordingly.
139. One route to greater flexibility in PFPs might be by adopting some of the features, such as provision for periodic review of prices, of the model applied to regulated utilities, which in Professor Glaister's view had "... worked spectacularly well" (Q 384). We recommend that the Government should explore the feasibility of importing into PFP contract terms selected features of regulatory review models for utilities.