6 Figure 13 compares the risk-adjusted net present cost12 of the PSC with the net present cost of procuring accommodation through PFI, in each case including those costs to be retained by the Home Office under either scenario. Figure 14 opposite shows how the costs of individual components of the PSC, have been adjusted for risk.
13 |
| Comparison between the Net Present Cost of the PFI deal and the Public Sector Comparator | ||
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| PFI transaction | |
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| Unitary Payment Stream (NPC) | N/a | 311 |
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| Conventional procurement costs including risk adjustment | 494 | 14913 |
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| Total | 494 | 460 |
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| Source: National Audit Office |
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|
14 |
| Risk adjustment to the Public Sector Comparator | ||
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| Component | NPC (£m) | Risk adjustment to the PSC |
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| Property (including site acquisition, disposal of surplus land and residual value) | -21 | Total risk = 7% (£1.5m) |
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| Construction costs (including development, pre-operating and insurance costs) | -199 | Total risk = 5% (£9.1m) Risks associated with demolition, foundation construction, unforeseen problems with the site, design cost overrun, time overrun, furniture cost assumptions and inflation assumptions were identified. |
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| 2 Marsham Street running costs | -107 | Total risk = 27% (£28.9m) Quantified risks included predicting the costs of a service, service standards not being met and the potential impact of market testing on indexation rates. |
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| Pension and redundancy costs | -3 |
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| Cost of running existing buildings (including rent) until 2 Marsham St is ready for occupation | -87 | N/a |
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| 2 Marsham Street running costs not included in PFI bid | -14 |
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| Rates for existing buildings and for 2 Marsham St | -108 | N/a |
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| Property Strategy (sale of surplus buildings) | 49 | Total risk = 7% (£3.5 million) Estimated by Knight Frank |
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| Operating insurance | -4 | Total risk = £4 million |
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| -494 | TOTAL RISK = 9% (£47 million) |
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| Source: National Audit Office |
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7 Overall, the Home Office determined that the PSC is £34 million higher than the cost of procuring accommodation through PFI. In examining the adjustments made for risk, we note the following points.
■ The relatively low risk adjustment (£9.1 million or five per cent) to the construction costs reflects the view that the construction of 2 Marsham Street was not expected to be particularly technically demanding. Most of the risks relate to those associated with the demolition and unforeseen problems with the site.
■ The PSC running costs include a high risk adjustment (£29 million, 28 per cent). The Home Office's evaluation of AGP's bid noted that running costs were high compared to the competing bid but took the view that the PFI bid as a whole was value for money and that it was not possible to cherry pick individual elements. At selection of preferred bidder, the running costs were reduced in detailed negotiations of the payment mechanism, without material dilution of service quality.
■ It is not government policy to insure its buildings but the Home Office decided to include the cost of basic insurance and the cost of insuring the building against latent defects as a surrogate for risk. This is in accordance with general recommendations on constructing PSCs which suggests commercial insurance may be used as an approximation of the value of risk borne by the Government.
■ The total risk adjustment in the PSC is £47 million (nine per cent). However, this calculation includes the element of the PSC which is for costs retained by the Home Office in either case. The risk adjustment to the element of the PSC which equates to the PFI payment stream is £42 million (12 per cent).
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12 The net present cost represents the amount that would have to be invested at the start of the contract to fund the expected future cash payments. In this case, it is calculated as the total of the amounts payable expressed at 2002 prices and discounted at six per cent per annum to the start of the contract. At the time the comparison between the PSC and the private sector bid was made, use of a discount rate of six per cent was in accordance with the Treasury’s guidance.
13 Costs which have been retained by the Home Office are included in the Public Sector Comparator and have been added to the cost of the PFI solution to allow a like-for-like comparison. However, the costs added to the PFI solution have been adjusted to reflect savings expected to accrue under PFI. The Home Office assumed that the construction period would be longer under conventional public sector procurement as the PFI timetable was considered ambitious. Under PFI there would be savings in the running costs of the existing estate because of its earlier vacation and the earlier revenue from its disposal.