26. Departments have tended to bail out contractors who have not delivered or got into trouble, often after a period of delay or indecision in which the situation has got worse and losses have continued to mount. Departments have been reluctant to take a robust line with contractors who have failed to deliver what is required under the terms of the contract. Rarely, for example, have contracts been terminated, often because of the fear of costly litigation and counter claims by contractors.
27. If contractors successfully manage the risks that have been allocated to them and deliver the services required they can expect to earn rewards commensurate with the level of risk that they have borne. But commercial discipline is undermined if contractors get the impression that risks will be taken back by the public sector if they materialise in any serious way.
28. One function of risk capital in a project is to secure the commitment of those who subscribe it by giving them something to lose if the project fails. It is a false economy to proceed with a deal in which too little risk capital has been subscribed by the private sector. In the case of the Royal Armouries and the Channel Tunnel Rail Link, the public sector rewarded private sector failure by agreeing to reduce the risk of the contractors losing their equity investment when the private sector had not delivered.
29. An essential public service will need to continue operating even if a particular contractor is unable to deliver the service for which it is contractually responsible. This ultimate business risk cannot be transferred from the public sector to the private sector. Departments need to identify the possible consequences arising should this risk materialise and take steps to manage it throughout the contract.
30. A common feature of deals that have hit trouble is that contingency plans have been inadequate. In many cases matters have become more serious or departments have become locked into unfavourable courses of action because they have not had a fall-back position when things went wrong. The need for a fall-back position is no different from the need for contingency plans for all programmes, whether carried out through a PFI scheme or by directly employed staff.
31. Figure 5 shows examples of PFI projects that have encountered problems after contract signature.
Figure 5: Examples of problematic PFI deals
PFI deal | Committee's findings |
Immigration and Nationality Directorate (7th Report, Session 1999-2000) | The aim of the project was to overcome backlogs of work and concerns that cases were not being handled consistently or efficiently. When delivery of the system was delayed and things started to go wrong the Directorate's contingency planning was inadequate. It consisted only of continuing with the old, paper-based system of working. |
Passport Delays of Summer 1999 (24th Report, Session 1999-2000) | During the summer of 1999, many members of the public encountered great difficulty in obtaining passports from the United Kingdom Passport Agency. The Agency's contingency planning proved inadequate, despite the lessons of the flawed implementation of the Agency's previous computer system in 1989. When serious risks crystallised in the crisis of 1999, the Agency was unable to hold the contractor liable for meeting anywhere near the full costs which arose. |
The Benefits Payment Card project was intended to replace the existing paper-based methods of paying social security benefits with a magnetic stripe payment card. The contract was awarded in May 1996 and cancelled in May 1999. It took 18 months from the point where the Department took steps to preserve its right to cancel the project, to take the decision to do so. Meanwhile abortive costs were rising and development of alternative arrangements was stalled. | |
Under this PFI deal the contractor was required to build and operate a new museum in Leeds for the Royal Armouries. However, the Department effectively bailed the company out to the tune of over £10 million when it ran into financial difficulties and faced imminent insolvency. There were no contingency plans in place, as it was considered that the risk of the project's failure lay with the contractor. However, the business risks ultimately lay with the public sector as the Department and the Royal Armouries were unwilling to countenance the closure of the museum and had therefore stepped in to rescue the project. | |
The deal to build the Channel Tunnel Rail Link left the Department exposed to very substantial risk in the event of failure by the contractor to raise long-term finance. In deciding to restructure the deal, the Department put in place complex arrangements that will expose the taxpayer to substantial risk for many years to come. The level of equity capital was insufficient to reflect the high level of commercial risk in this project, which depended on inherently risky forecasts of passenger numbers. |