3.11 The Government's approach is to use PFI only where it can offer the best value for money. Public procurement cannot choose the short-term, least-cost option, but must instead concentrate on the true value and whole-of-life costs of capital expenditure to secure the long-term quality of the public services. The public sector needs the skills, at all levels, to identify the true benefits of good design and quality construction and maintenance, and take into account all the costs associated with major investment projects. Value for money benefits in PFI should not come at the expense of employees' terms and conditions.
3.12 The Government defines value for money as follows: "the optimum combination of whole-life cost and quality (or fitness for purpose) to meet the user requirement".2 In seeking value for money for PFI, the Government seeks to ensure that:
• the evaluation of which procurement option to use is undertaken with no inherent preference for one option over another. There should be no dogmatism in this choice. Decisions should be made on the best evidence available;
• value for money is not taken to be least cost. There is a need to ensure that quality standards are maintained, for example in the design of public infrastructure, and the long-term viability of the PFI contractor is assured;
• the commitment to value for money should not be at the expense of the terms and conditions of employees transferred or subsequently employed by a PFI contractor; and
• a full evaluation of the costs and benefits on a whole-life basis is always undertaken, including an assessment of risk. (See paragraphs 7.2 to 7.20 for further details of the appraisal process and proposed reforms.)
3.13 The Government in the Green Book3 and guidance on Public Sector Comparators (PSCs)4 has set out extensive guidelines on how to assess value for money in PFI. Paragraphs 7.2 to 7.20 of this document set out further proposals to improve the procurement and appraisal process. Although assessing value for money will always involve a significant quantitative analysis of the merits of different procurement approaches, the emphasis on optimum whole-of-life cost and quality requires that objective professional judgement based on the best available evidence be brought to bear in determining the best procurement option.
Box 3.1 Addressing the weaknesses of past public procurement The historical record of Government procurement shows that too often new assets have been delivered late and over budget. Furthermore, where projects experienced difficulties, the financial costs have been borne by the taxpayer. For example: • the initial cost estimate of Guy's and St Thomas' Hospital rose by £124 million to £160 million and the completion date slipped by over three years; • the cost of the Trident submarine shiplift and berth at Faslane rose from an estimate of £100 million to a final cost of £314 million, and was delivered two and a half years late; • the London Underground Jubilee Line extension was delivered two years late and cost £1.4 billion more than original estimates; and • the top twenty five equipment projects in the MOD experienced cost overruns amounting to £2.8 billion with average delays of three and a half years. A 1999 NAO study found that only 30 per cent of non-PFI major construction projects were delivered on time and only 27 per cent were within budget, whereas the NAO's report on PFI construction performance showed that over 70 per cent of PFI projects were delivered on time, and no construction cost overruns were borne by the public sector. This record reflects a number of weaknesses that have beset public procurement in the past. In particular, the full costs of projects have not been calculated accurately beforehand, risk management procedures have not been implemented, and there have been insufficient incentives, for management or organisation-wide, to ensure that projects are driven forward successfully. These factors have helped establish PFI as an effective public procurement mechanism where it can be properly and effectively employed. The NAO's 2002 report into PFI's construction performance found that 76 per cent of PFI projects were delivered on time or early and Treasury research on a larger sample found 88 per cent on time or early. Both the NAO's construction survey and HM Treasury's research reported in Chapter 4 found that 78 per cent of PFI projects were within public sector budgets - and in each case, price changes were driven by changes in public sector requirements, not construction cost overruns. This result demonstrates that construction risk transfer has been effective, as cost overruns were not borne by the taxpayer. (See Chapter 4 for more detailed results of HM Treasury research.) The Government, through the OGC and other initiatives, is taking steps to ensure improvements in all types of procurement, including both conventional procurement and PFI. The OGC expects to deliver £3 billion worth of value for money gains in civil procurement through better public sector skills, value for money testing and other efficiency savings, by 2005-06. |
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2 Government Accounting.
3 The Green Book: Appraisal and Evaluation in Central Government, 2003.
4 Treasury Task Force Technical Note 5 - How to Construct a Public Sector Comparator.