We were pleased to take this opportunity to reflect on over 12 years' of National Audit Office work on the use of private finance in public service delivery. Our work has encompassed the impact of what is now more than 100 Private Finance Initiative (PFI) projects across the central government accounts we audit annually. We have also produced 72 value for money reports to Parliament on PFI and other uses of private finance across the public sector.
This paper shows that arriving at a simple evaluation of the overall private finance programme is not easy. Some projects are tendered and managed well; others are not. This is true regardless of the procurement route and many of our criticisms of private finance projects can also be applied to projects funded conventionally. But private finance projects are complex commercial deals. Their success or failure is particularly influenced by how well the commercial issues are handled.
Private finance has become the predominant form of investment in many sectors. With few large projects using conventional funding, it is difficult to compare the costs and benefits of using private finance to alternatives. This drive towards using private finance is in part driven by Government officials' belief in its benefits. But it has also been driven by a less commendable zeal for off-balance sheet solutions which have not appeared in statistics of Government debt.
It is also fair to note that the final judgement on value for money for each project cannot be made until their 20 to 30 year contracts have run their course.
For these reasons it is difficult to arrive at a simple summary of the value for money of using private finance as a procurement option. But to try and put all of this in a short statement: our view is that private finance can deliver benefits, but it is not suitable at any price or in every circumstance.
There are a number of points that we particularly want to stress.
Firstly, there is a pressing need for better quality evaluation of private finance and other forms of procurement across Government. The National Audit Office will continue to provide robust independent analysis. Government, especially the Treasury and spending Departments, however, need to take greater responsibility for evaluating their programmes and projects. They need particularly to ensure that they can compare the benefits and costs of different procurement routes.
Secondly, assessing the pros and cons of alternative procurement routes is especially important in the current economic climate. We know that the cost of private finance has risen since the credit crunch. This does not necessarily rule private finance out as an option for new projects, but it has implications for their value for money. Project teams embarking on new projects need to carefully consider these implications.
And thirdly, the introduction of International Financial Reporting Standards has brought the opportunity for a more consistent approach to the balance sheet treatment of PFI across the public sector. As a consequence we expect nearly all PFI schemes to be brought on-balance sheet. We believe that is the most transparent and reasonable treatment for what are, essentially, publicly controlled projects. But the decision to use different rules for the Financial Statements of Government Departments on the one hand, and their Departmental Budgets on the other, is not an ideal position.
We also hope that this paper will act as a catalyst for further debate and evaluation. There are a number of questions worth asking:
- Some private sector investors are consolidating the ownership of their side of PPPs into portfolio investment funds, through the secondary market. They hope to derive profit from the better management of the projects from the private sector's point of view. How, by extending this reasoning, should the public sector manage its 700 or so private finance projects?
- The success and failure of private finance projects are determined to a large extent by the way the commercial issues are handled. Is Government taking sufficient action to ensure Departments have suitably experienced project and contract managers?
- How will Government's need to contain public spending in the current economic climate impact both on new projects and also projects currently in operation?
We look forward to hearing feedback on these issues. Meanwhile, we will continue to use our independent analysis of Government spending to provide further reports commenting on the value for money of both private finance and other procurement methods.