1.6 The Treasury-chaired Project Review Group was responsible for the scrutiny of business cases for major PFI contracts. Partnerships for Schools undertakes the same role for schools contracts. Both require projects to rework the economic assumptions behind the choice of procurement route, made at the Outline Business Case stage, if there has been market failure or a major change. Current guidance does not contain an actual number to define what constitutes a major change, relying instead on overall judgement. Some projects such as schools, however, took guidance from August 2004 exemplifying major change as an increased cost, in real terms, of 25 per cent.
1.7 In our audits, previous business cases often indicated that PFI projects were expected to deliver savings in the range of 5 to 10 per cent. We have also reported in the past that there were flaws in these comparisons between the PFI price and conventional procurement.1 An increase in the cost of finance therefore represented an increased risk to value for money, and could have led to reappraisals of the value for money of individual projects. A review of a sample of Outline Business Cases by Partnerships UK estimated, however, that all cases remained value for money at higher bank risk margins of 3 per cent.
1.8 Given the Government's policy objectives for stimulating the economy, we accept that delays from resubmission of individual business cases might have put the policy at risk. We also generally accept the case for absorbing higher financing costs for projects at an advanced stage in 2009, but would still have expected some supplementary analysis of the impact at the project level. In particular, where projects had yet to be fully developed, we would have expected departments to have presented wider value for money assessments to the Treasury on the benefits and disadvantages of proceeding with their PFI projects.2 Where applicable, this should have included the effect of the public sector taking on greater project risks, where the banks made this a condition of their financing, balanced against lost service benefits from delaying the projects. Such analysis would have improved the Treasury's understanding of the trade-offs involved in accepting higher financing costs, as well as informing future decisions on the use of PFI.
1.9 Delayed projects were vulnerable to the credit crisis. The M25 case study, for example, shows a cost increase of over £600 million on a contract which had originally been due to close in February 2008 (Appendix Three).
1.10 One school case, however, illustrates how innovation mitigated the disruptive effect that the credit crisis had on certain projects reaching contract closure. In this project, to build a new school in the London Borough of Newham, the bank supporting the winning bidder withdrew a month before the planned financial close. Partnerships for Schools proposed a solution based on the Local Education Partnership contracting a Design & Build contract, without committed private finance.3 On an exception basis, the Treasury allowed the London Borough of Newham to conclude this school project on condition that interim grant funding would be replaced by private finance within six months, which was achieved.
________________________________________________________________________________________
1 See, for example, Private Finance Projects, A Paper for the Lords Economic Affairs Committee, October 2009, paragraph 4.9, pages 46-47.
2 An example of this form of analysis is in Appendix Five of this report and can be found at www.nao.org.uk/infrastructure-financing-2010.
3 See National Audit Office The Building Schools for the Future Programme Renewing the secondary school estate, February 2009 for an explanation of the Local Education Partnership role.