1. Question 1-How should the cost and benefits of Private Finance projects be assessed? What discount rate should be used in comparing Private Finance with conventional public procurement? Are current procurement procedures satisfactory? Is enough information disclosed on Private Finance projects fully to assess whether the taxpayer is getting value-for-money?
1.1 Cost-benefit analysis for private finance projects should be evaluated holistically using a Value for Money (VfM) assessment. In its VfM guidance, HM Treasury defines value for money as "the optimum combination of whole-of-life costs and quality (or fitness for purpose) to meet the user's requirements".1 The very nature of Private Finance projects, whereby a consortium contracts with a procuring authority not only for design and construction but also for maintenance, operation and asset management of a facility, embeds this principle of whole-life costing. Similarly, quality to meet defined long-term end-user's requirements is a fundamental part of Private Finance projects, requiring ongoing active management to make this a success.
1.2 HM Treasury's guidance on VfM combines both a qualitiative and quantitative assessment, so that too much weight is not placed on comparative costs (PFI versus traditional procurement) which can only ever be approximate. Accurate cost-benefit comparisons between projects delivered through private finance and traditional procurement are hard to make because like-for-like information on traditional procurement is limited. The VfM Quantitative Assessment which HM Treasury provide in their guidance2 is based on assumed Optimism Bias (understatements in forecasts for capital expenditure and long-term maintenance in traditionally procured projects) which, although based on previous experience, cannot be regarded as definitive. The guidance emphasises the need for a combined approach, not placing too much reliance on the quantitative assessment, which seems entirely appropriate in the circumstances. The VfM assessment could be improved if more information were available on the cost of traditionally procured projects, including costs of procurement, construction and long-term maintenance, to match the extensive body of information on PFI projects. This information should not only be used to make the internal VfM assessment more accurate, but should also be made public to allow a more informed debate on the merits of PFI in the public arena.
1.3 Caution must be shown when seeking to make comparisons between traditional and privately financed projects that are based on "brick for brick" pricing alone, since this disregards the fundamental differences in the scope of traditional and privately financed projects. Private finance allows a clearer focus on long-term outcomes for clients and communities, including non-monetary targets (such as educational outcomes within the Building Schools the Future Programme, or Health & Safety targets for some roads projects), that cannot be effectively incorporated into traditionally procured projects.
1.4 A sensible measure for the discount rate used in comparing private finance with conventional public procurement is the public sector cost of funds plus a risk premium to recognise the differences between the two approaches. Independent reviews comparing the effectiveness of PFI and traditional procurement have consistently shown that traditional procurement compares very badly in terms of its failure to deliver capital works on time and the frequency of cost overruns (see 2.4 below). Under HM Treasury's VfM Quantitative Assessment, the risk premium is recognised by means of estimates for Optimism Bias in traditional procurement, and a single discount rate (3.5% real) is applied to all assessments.
1.5 Current PFI procurement procedures have successfully delivered a large number of infrastructure projects, as illustrated by the substantial increase in UK infrastructure investment pre and post 1997, and the part played by PFI in that.3 Nevertheless, the process could benefit from the following improvements:
- Procurement through the private finance route under the Competitive Dialogue process can sometimes be more costly than necessary. The costs borne by each bidder can represent a significant percentage of capital expenditure, including duplication of early stage costs (eg investigations and early design work). In part, we believe that this derives from a fear of criticism in public sector bodies, which leads them to be particularly risk-averse in the extent of detailed development at early stages of a bid. Far less scrutiny is applied to equivalent projects procured under framework or traditional procurement routes. Procuring authorities are well aware of this issue in PFI procurement, and have improved processes to some extent, although there is further to go.
- Procurement through the private finance route can be a lengthy process. This in itself creates significant costs for both the public and private sector parties, in terms of direct staff resource and expenditure on external advisors. Sometimes, delays can occur because of insufficient pre-launch planning, or unrealistic expectations on cost or scope, which can lead to the need to seek re-approval for higher funding support during a procurement, causing delay. Comprehensive planning before launch is clearly critical, which is embedded in Government procedures, but still needs to be adhered to more closely.
- More focus should be placed on developing new models for procurement that capture the potential for Public Private Partnerships to deliver multi-sector regeneration projects that are better aligned to the joined-up needs of communities (we have considered this in more detail in our response to Question 9, below).
- Supporting the need for more "like for like" comparisons between privately and publicly financed projects, more information should be disclosed about the performance of both types of project, analysed by sector/type to facilitate its use (as noted in 1.2 and 1.3 above). For example, delivery dates, budget control, customer satisfaction, response and rectification, change control, lifecycle management and end user outcomes. Such information would help effectively communicate how VfM is achieved through these projects and would ensure that a more meaningful assessment and comparison with private finance is possible. As outlined above, all privately financed projects are subject to scrutiny on a regular basis, meaning that performance information is readily available for these projects. This is rarely communicated outside of industry press and successes are not widely acknowledged in the mainstream press.