13. PFI projects involve long term relationships between departments and contractors and need to be approached in a spirit of partnership, where both sides are open, share information fully and work together to solve problems. The partnership needs clear governance arrangements setting out how performance will be monitored, problems will be resolved and new services or other changes will be introduced.
14. Where contractors do not meet the required standards of service, most contracts allow departments to make performance deductions from the payments due. Whilst some fluctuations in performance are to be expected in a long term contract, the number of contracts with performance deductions suggests that some departments are not getting the service that they require. As with all public services, whether privately financed or not, departments must ensure that their PFI contracts do not allow persistent or serious under-performance to go unchallenged.
15. It is important in long-term contracts that performance and costs are measured regularly against the market to maintain pressure for value for money. Yet many contracts do not have the appropriate mechanisms, such as benchmarking, market testing and open-book accounting, to ensure that value for money is maintained over the lifetime of a project. Such mechanisms need to be an integral part of the contractual and governance arrangements for all contracts.
16. Long-term contracts should provide room for flexibility in the face of changing circumstances. Such changes might relate to alterations in services covered by the original specification, the introduction of new services, or amendments to performance measurement arrangements. Appropriate contractual procedures for dealing with change need to be built into contracts. There is a tension between leaving room for necessary changes whilst not letting contractors make undesirable changes that are to the detriment of the public sector. For example, departments need to watch that change procedures are not abused as a covert means for contractors to increase profit margins.
17. The public sector should be able to share in the benefits of a successful partnership with private sector contractors. Successful projects will create opportunities for better financing terms as financiers will see that project risks have reduced once the service is being delivered satisfactorily. A refinancing can then greatly increase the returns to the private sector. But successful delivery of a PFI project is never a one-sided matter: success will come from the public sector and private sector working effectively together. It is welcome therefore that, following the work of this Committee and the National Audit Office, the Office of Government Commerce has agreed with the private sector that refinancing gains on PFI deals should be shared. On past deals gains are to be shared 70:30 between the private sector and the public sector and on new deals the split is expected to be 50:50.
18. Having staff with the right skills is critical to good project management. But there are significant shortcomings in the approach of some departments to managing PFI contracts. Departments need to give much greater emphasis to developing the project management skills needed to get the best out of their PFI contracts.