5. When the basis of a Private Finance contract needs to be altered post procurement because of changing client needs-for example, a bigger jail is required due to a larger than expected prison population-has this proved problematic compared to projects under traditional procurement? What has been the experience of PFI projects that have reverted to the public sector?
5.1 It is a benefit of PFI that costs of services can be set for a long period. As a corollary of that, PFI makes it harder for short-term budgetary pressures on the public-authority side to undermine long-term VFM-orientated decision-making. This again is a benefit, in the long term. The determination of long-term fixed prices should not be seen only as a hindrance to flexibility. Moreover, 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.
5.2 The nature of a PFI contract is that it requires clear decisions at the outset by the procuring authority. On the back of these decisions the service provider makes long-term planning and investment decisions and both parties enter a long-term contract for services. It should be expected therefore that change will tend to involve a greater level of process and potentially cost than were the public sector in a direct management role. PFI is only suitable where the procuring authority has a long-term need which it is able to articulate clearly.
5.3 Making changes to established PFI service requirements can be more expensive than the conventional equivalent because the authority is negotiating with a sitting contractor. To some extent this brings with it the due diligence and planning which is a positive feature of PFI. But as above-PFI is not designed for complete flexibility.
5.4 Nonetheless there is a distinction between inadequate planning and genuine significant unforeseen changes in service demand or authorities' financial resources. Authorities can weight the importance of flexibility in the technical or financial solution as they wish in the procurement of each project, and there are contractual provisions for contract changes. These have to work within the overall conceptual approach but do give comfort around the cost of changes. SOPC417 includes guidance on "Change Protocols" with featuressuch as pre-agreed costings for small changes and a role for competition in respect of larger ones. The NAO published, in 2008, a detailed review of the experience of making changes to PFI contracts.18
5.5 We would also note that some of the supposed costs of changing PFI arrangements are illusory. Whole-life costing can make the costs of changes in the PFI context not so much higher as more transparent as the long-term implications of changes will be estimated and paid for. Moreover, all sunk costs are inflexible: with up-front payment for an asset, if it turns out later that that asset is not needed there is no need to pay for it again but it has been paid for. With PFI, contract termination by the authority (and to a lesser extent major changes) can crystallise payment obligations because the unitary charge is only slowly paid over time and in effect needs to be accelerated.19 This appears expensive but work undertaken needs to be paid for in both cases.
5.6 As regards the last point in the question, there are relatively few projects which have reverted to the public sector and we are not aware of research on this particular point.
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17 PFI standard contract guidance, see www.hm-treasury.gov.uk/ppp standardised contracts.htm.
18 "Making Changes in Operational PFI Projects", January 2008, www.nao.org.uk .
19 Although SOPC contains some provision for payment by installments. Payments also may include an element of future profits for the PFI contractor.