1.6 The pilot reviews have confirmed the draft guidance recommendations for achieving operational savings. These can be summarised as:
• effective management of existing contract terms (including performance regimes and cost/gain share mechanisms, for example in relation to insurance or energy costs);
• optimising the use of asset capacity - and avoiding marginal costs of surplus capacity where possible through mothballing or subletting; and
• reviewing the specification of soft services so that the public sector only pays for what it needs, standards are applied consistently across PFI and non PFI facilities, and value testing provisions are used effectively.
1.7 The opportunities for making savings are greater from some elements of PFI unitary charges than others:
• Any construction cost is effectively a sunk cost, and decisions taken at the point of specification of an asset or property drive a proportion of future unitary charges that repay the capital investment over the contract term. There can be scope for savings to be achieved from debt refinancing by the project company (with gain share for the public sector) if market pricing reduces after the project finance was raised. However for long term fixed rate borrowing the base cost of funds element of financing costs is effectively committed for the term of the financing.
• The lifecycle and maintenance costs of the property are bound up with the asset design, construction and management risk transferred to the Project Company at the outset - as such these costs are relatively inflexible without changes to the risk allocation of a project.
• Soft services (to the extent included in the PFI contract) are typically provided under short to medium term sub-contracts, and so are relatively more flexible should changes be desirable. The costs reflect the specification of the services commissioned by the procuring authority, and as such are not driven by the procurement route that has been chosen (ie for the same specification, the costs under PFI or conventional procurement should be similar). The pilots confirmed that is in this area of PFI unitary charges that most opportunity is available to extract operational savings.
• A small element of PFI unitary charges covers project company insurance, risk premia, advisory costs and other fees and can offer savings opportunities covered in this guidance including insurance cost and gain share provisions and the potential to take back change in law risk.