3.11 Before submitting the Full Business Case to the London Regional Office (LRO) and to the Department for approval, the Trust checked the PSC. In doing so the Trust was addressing a recommendation in our report on the Dartford and Gravesham PFI hospital that these calculations should be subject to rigorous review in order to eliminate material errors. The checking work included a review by the Trust and KPMG of the risk analysis which was part of the PSC.
3.12 The Department told us that it would not necessarily withhold approval for a PFI project that appeared slightly more expensive than conventional procurement if there were convincing value for money reasons for proceeding with the deal. In this case the initial estimated costs of the PSC were lower than those of the PFI deal. Both the Trust and KPMG were satisfied with the overall value for money of the deal, taking all benefits and disbenefits into account. But they had concerns about the accuracy of this initial financial comparison and whether an estimate showing the PSC cheaper than the PFI deal would prevent them obtaining Departmental approval.
3.13 Developing the risk assumptions in the risk analysis is an iterative process. As part of this iterative process the Trust and KPMG re-appraised the figures to ensure the risks inherent in traditional procurement were properly reflected in the PSC. The Trust and KPMG believed there were underestimates in the risk figures, some of which related to factors arising from the NHS Plan. KPMG encouraged the Trust to revisit these figures as it believed the risk analysis was incomplete. Risk workshops were held and adjustments to cost and risk estimates were completed before seeking Departmental approval, which resulted in the PSC becoming slightly higher than the PFI price. The final calculations showed a risk-adjusted saving from using the PFI of £5.5 million compared with a PSC, including project costs and clinical costs, of £989 million over 35 years (net present values). As with all long-term cost estimates there are inherent uncertainties in this comparison, and particularly regarding the size of the adjustment for risk. The Department was satisfied with the resulting risk assumptions. The total value for risk included in the comparator, including about 15 per cent of capital costs for construction and design risks, was reasonable. It fell within the Department's range for expected risk transfer based on historical evidence from PFI projects, and was in the middle of the range indicated by a recent wider study.19 The re-assessed cost comparison therefore reinforced the value for money case for the PFI deal. There are unquantified benefits which supported the view of the Trust and KPMG that the PFI option would deliver value for money taking all benefits and disbenefits into account.
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19 A recent study commissioned by the Treasury estimated a range for construction cost overruns in standard building projects of between 2 and 24 per cent: Review of Large Public Procurement in the UK, Mott MacDonald July 2002.