2. How does the performance (eg, cost, delivery dates and service quality) of schools, hospitals, prisons, roads and other projects operated under private finance compare to those which were traditionally procured?
Constructed and operated on time and on budget: During the construction phase, PFI procurement has a proven better track record of bringing projects in on-budget and on-time in comparison to traditional procurement.
Some numbers: A 2003 NAO report on the construction of PFI projects6 stated that "[procuring] departments were obtaining a high level of price certainty under PFI contracts, and there was little change in the payments as a result of construction related changes"-70% of contracts had no price change at all, and the 30% that did were all due to authority-led changes which would have also resulted in price increases under traditional procurement (with only six of 37 having an increase in annual payments of more than £10,000).7 Compare that with 73% of traditionally procured projects which ran over budget according to a 1999 study referred to in the 2003 NAO report,8 and according to the 2002 Mott MacDonald report9 cost overruns of up to 51% for building projects and 66% for engineering projects which was attributed to "the large number of risks excluded from the contractor's price at the award stage".10
The 2003 NAO report also stated that "76% [of PFI projects] were ready to use by the contractual deadline" (and only three of the 37 surveyed were more than two months late),11 compared with a finding in the 2001 NAO report12 (based on the 1999 study referred to above13) that 70% of traditionally procured projects reviewed were delivered late.14
Some traditionally procured assets help illustrate how costly and late they can be-Thames Barrier: estimated cost £54 million and build period of four years, final cost £535 million15 and it took eight and a half years to build; Scottish Parliament: original budgeted cost £109 million, final cost £431 million and three year delay;16 British Library: estimated cost £116 million, final cost £520 million17and four year delay; Guy's Hospital Phase III: estimated cost £83.1 million, final cost in excess of £152 million18 and a three year and four months delay.19
Inherent discipline in PFI projects: One reason PFI projects are on-time and on-budget is that the process of procuring, and the structure of, a PFI project typically instils discipline and rigour to its procurement. A high level of initial due diligence is required before the procuring body can make a business case for the project to get Treasury funding for the ongoing service payments. And a high level of detail is required as a result of the procurement procedures and as a feature of the contractual structure of a PFI. This means that the procuring body needs to decide in detail what it wants before the contract is signed, which results in better-developed projects going to market, and the need to vary the contract after its award (particularly during construction) is reduced. Under traditional procurement though the award process is shorter and less complicated, the trend has been that contracts are regularly varied after award, resulting in significant costs increases and delays to the construction process.
In addition, the private sector has a proven better track record of being able to (and it is in its interests to) control costs during construction and operation. Due to risk transfer such costs are, as regards the public sector, fixed and, rather than haggling for payment of cost overruns, the private sector is focussed on the project becoming operational, and on continuing to operate the asset, in accordance with the PFI contract to ensure that its long-term payment stream under the contract commences and continues to flow.
PFI ensures standards of operation and maintenance: During the operational phase, as noted above, it is difficult to make a comparison (of PFI vs traditional procurement) given the lack of data available on the operation and maintenance of traditionally procured projects.20 But the presence in PFI contracts of required service levels and the transfer of life-cycle risk to the private sector, the fact that there are payment deductions for not meeting service standards, and the fact that those service levels and maintenance requirements are locked-in for up to 30 years, means that the assets should be operated and maintained to a certain level each and every year. It appears that there is no equivalent procedure (or incentive) in the public sector to track and maintain performance. The long-term nature of PFI deals also enables procuring bodies to make long-term service delivery plans and is a major improvement on traditionally procured assets whose operation and maintenance budgets remain exposed to cutbacks or redeployment.
And performance levels are being met: In Treasury's review of over 500 operational PFI projects,21 79% of projects reported that service standards are delivered always or almost always, 89% reported that services were being provided in line with the contract or better, 83% reported that their contracts always or almost always accurately specified the services required, and 72% report good or very good service.22