15. In the report, the Treasury proposed to add to some areas of its PFI value for money assessment guidance, the updated version of which was released in November 2006. The most notable aspect of the updated guidance is that the Treasury strengthened the test for whether it is appropriate for authorities to include "soft services" (services not related to the building infrastructure such as catering, and cleaning) in PFI contracts.
16. The Treasury report provides guidance that departments have the option of not including soft services in a PFI project where they believe their transfer is not required for achieving the overall benefits of improved service delivery required by the procurer. The assessment of whether soft services are to be included is on value for money factors demonstrating how the particular benefits of the chosen procurement route will be realised, taking into account the particular trade-offs involved on a case-by-case basis.
17. We agree with the Treasury analysis which shows that a detailed assessment is required to understand the balance of advantages and disadvantages of soft service inclusion in a particular project. Based on our experience of the PFI and other outsourcing markets factors that appear relevant are:
- The case for including soft services in PFI contracts is that the soft service providers will then be a key part of the private sector PFI team and, in a building project, can then contribute to decisions about how the building should be designed and how the project should be priced to make the most efficient use of soft services.
- The case for excluding soft services from PFI contracts is mainly to test whether better value for money might be achieved for these services if the services can be recompeted, say every three or five years. There are, however, arrangements whereby the value of soft services can be benchmarked or market tested within a PFI contract, usually every five years, which allow authorities to ask for new service contractors to be appointed if the existing contractors are unable to provide the services on terms which are value for money. If these arrangements, which are in the early stages of being used by authorities, work effectively then the ability of authorities to replace contractors within a long term PFI contract should be similar to what would have arisen if the soft services had been excluded from the PFI contract and relet on a series of short term contracts.
18. The NAO is examining the initial experiences of using these arrangements as part of a report to be published in the first half of 2007 on the benchmarking and market testing of ongoing services in PFI contracts. The forthcoming PAC hearing on this report will enable the Committee to consider further these issues relating to testing the value for money of soft services in PFI contracts.
19. The other area where the Treasury will be adding to its guidance on the assessment of the value for money of PFI deals includes the consequences for authorities of different financial structures which bidders may propose. The type of financing structure used (for example whether bond or bank finance is used for debt finance) can have implications for the authority in terms of how contract variations which the authority may wish to undertake during the contract period will be funded or implications for seeking to terminate the contract. The updated value for money guidance November 2006 outlined these issues, with further assistance to follow in the Treasury's update of standard contract terms guidance.