1. Under the PFI a department gets its project now and pays for it later. The attractiveness of not having to find the money up front to meet the initial capital costs, together with a perception that the PFI is the favoured option, creates a strong incentive for departments to present their PFI deals as the preferred choice simply to get them to proceed. Departments may also be under pressure to choose the PFI option so as to keep debt off the public sector balance sheet. These potential risks underline how important it is that the PFI route should be chosen only after a robust value for money assessment of all the options.
2. To help in assessing whether or not to go ahead with a PFI option, departments are required to prepare a public sector comparator-an estimate of what a project would cost if conventional procurement methods were used. Public sector comparators focus solely on relative costs, yet they have often been used incorrectly as a comprehensive pass or fail test. Decisions on PFI deals need to be based on a realistic, systematic and comprehensive analysis of benefits and risks as well as costs. A robust public sector comparator should be just one of the factors in this assessment.
3. Some public sector comparators have contained material errors and omissions. Others have been given a spurious precision as a result of over-complexity, a pre-occupation with financial modelling, and a failure to take account of uncertainties. Some public sector comparators have been manipulated to get the desired result. There is a need for a more intelligent use of public sector comparators by departments, with due recognition of the inherent uncertainties involved in the calculations and an awareness of the limitations of the resulting forecasts.
4. The appraisal of alternative options should not stop once the decision has been taken to procure a PFI deal. At each key stage of the procurement, and particularly before contract signature, it is essential that an assessment should be carried out of the value for money of the proposed PFI deal against the best alternative available at the time. Departments should not plough on with a poor deal just because they have spent time and effort on it. They should be prepared to start the procurement again if the best alternative solution looks likely to provide better value for money.
5. Financing costs form a significant part of the cost of a long term project. But it is often unclear how these costs are made up. Departments should always establish how the costs of private finance compare to other forms of procurement. Transparency of financing costs is essential both in comparing bids and in considering the merits of alternative forms of procurement.
6. The benefits of using the PFI approach are not always sufficient to outweigh the extra costs that private financing incurs. In some circumstances there may well be better ways of financing PFI deals. Consideration of more innovative ways of financing projects that might give a better deal for the taxpayer need to be investigated. We therefore look to the Treasury to examine how public authorities might obtain better financing for their PFI projects through alternative financing structures.