18 There is a need for greater challenge of both the decision to use private finance and the scope of the deal. The decision to procure assets and services creates long-term commitments. It is therefore essential that there is a robust, impartial scrutiny of the business case decisions on the form of procurement and project scope. The value for money case before the credit crisis was sometimes marginal. The case for the use of private finance therefore needs to be challenged, given our analysis which showed that the costs of debt finance increased by 20-33 per cent since the credit crisis. Also, although there is well developed Treasury guidance on assessing the value for money of PFI projects, the method of calculating public sector net debt may, even though the financial accounting treatment has changed, continue to act as an incentive to use PFI as it often leaves liabilities off the national balance sheet. This makes robust project assurance especially important. Finally, projects have not always considered how better negotiation on conventional procurement could lead to more challenging comparators to PFI procurement.
19 With an average contract period of 25 to 30 years, PFI contracts can be relatively inflexible. Long contract periods are needed to enable the private sector to repay the bank loans out of affordable public sector payments. There is a risk that any asset may become obsolete but in PFI, the termination costs would include breaking long-term service contracts.
20 There has also previously been little opportunity for public authorities to obtain further efficiencies during these long contract periods. Our PFI in hospitals report highlighted that there are limited PFI contractual mechanisms to share efficiencies although existing value testing14 of facilities services can generate savings. There has, however, generally been little evidence of a collaborative approach to identifying efficiencies with little use of open book accounting of private sector costs. The Treasury and Cabinet Office have recently launched a series of initiatives to seek cost savings on existing and new contracts.
21 Unlike its private sector contractors, the Government has not used its market position to obtain economies of scale. There are around 700 PFI contracts in the United Kingdom (500 in England), most of which are procured and managed locally. Whilst this encourages local decision-making, local bodies are not well placed to use the Government's buying power on common services such as catering, cleaning and building maintenance. Investors have, however, built portfolios of PFI projects from which economies of scale should be possible. There is no formal mechanism for the Government, which created these large markets, to share these gains.
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14 Value testing takes two forms: Benchmarking, where subcontractors' prices are compared to the market price for equivalent services and adjusted accordingly; and market testing, where services are re-tendered to test the cost of the contract in the market.