1.7 Changes often involve two distinct types of expenditure which are paid in different ways. A capital element covers the up-front costs, for instance of purchasing and installing a new piece of equipment. Once installed, the equipment will then need to be maintained and, if needed, eventually replaced.
1.8 In practice, the capital element of nearly all changes is funded directly by public sector authorities through a lump sum or staged payments without altering the existing unitary charge for the original deal. Additional operating costs for changes are usually funded through an adjustment to the existing unitary charge, and this method of funding is also used for changes which have no capital element, such as improvements to cleaning services in a building.
2 | Change is inevitable in long-term PFI projects, whether because of new policy initiatives or from changing local needs | |
Sector | Examples of policy change | Examples of localised change |
Hospitals | Agenda for Change - updating the terms and conditions of NHS staff transferred to the private sector. | NHS Trust needs to change the cleaning and isolation regimes in response to infection control issues. |
| Payment by Results - hospitals may need to alter bed numbers to reflect changing demand. | Hospital staff request new data points and sockets for an office. |
Schools | A move to electronic whiteboards requires new infrastructure. | Head teacher wants to reorganise a classroom or to introduce air conditioning. |
| Changing food standards for school dinners require different service responses. | CCTV cameras are needed to combat poor behaviour or vandalism. |
Prisons | National Offender Management Service - integration of prisons and probation services leading to a change in service level requirements and key performance indicators in existing PFI contracts. | Existing prison buildings are extended to increase capacity in light of higher demand for prison spaces. |
Roads | New road widening or traffic management scheme. New road surfacing standards. | Safety study indicates that the layout of a junction needs improving. Changes to signs or safety fencing. |
Social housing | Carbon emission policies require upgrading of insulation. | Installation of additional electricity sockets in existing houses. |
Waste | Changes to statutory targets for recycling and composting. | Alterations to deal with expansion of local waste recycling. |
Street lighting | Energy saving policies require changes to lighting units. | Accommodating advances in technology. Adding Christmas decorations and advertising to lamp posts. |
Source: National Audit Office survey 2007 |
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1.9 Based on our survey of operational PFI projects with capital values of more than £20 million, we estimate that the total capital cost of changes made in 2006 was approximately £164 million and that first year maintenance and replacement costs totalled £14 million (Figure 3). To put these numbers in context, this level of change represents just over one per cent of the total of unitary charges paid to PFI contractors in 2006-07.
1.10 One in five projects responding to our survey stated that work requested as a change since they became operational had been considered for inclusion in the original deal. In just under a half of these cases, work was taken out of the original deals for reasons of affordability, including changes or additions to assets ranging in value from £70,000 to £17 million. It is likely, however, that these projects will have paid more to introduce this work after they were operational, partly because of a lack of competitive tension once the incumbent contractor was in place and partly because the original design may not have incorporated the extra work.
3 | The capital and operating costs of changes made in 2006 |
|
Type | £ million | |
First year capital costs1 | 9 | |
First year change to on-going operating costs | 14 | |
First year capital plus operating costs | 23 | |
Unitary charges paid in 2006-07 | 2,140 | |
Changes as a proportion of unitary charges | 1.1% | |
Source: National Audit Office survey 2007 and HM Treasury (2007) | ||
NOTE 1 This is the sum of the capital cost of changes for each project divided by the remaining life of the contract. | ||