4.6 The Government has significant purchasing power. It could use its purchasing power to negotiate better outcomes. Unless, however, it adopts a coordinated approach, the risk is that departments and public bodies fail to optimise this power. On PFI hospitals, the Committee of Public Accounts recently concluded that the Department of Health, by not negotiating with investment funds centrally, was not using its buying power to leverage gains for the taxpayer. The Committee noted that specialist investors have interests in large numbers of PFI projects. One fund has a substantial portfolio of hospital projects, giving it the prospect of economies of scale, with no corresponding benefit to the public sector.46
4.7 There has previously been little opportunity for public authorities to obtain further efficiencies during PFI contract periods which can be thirty years or more. There has generally been little evidence of a collaborative approach to identifying efficiencies with little use of open book accounting of private sector costs.
4.8 In recent months, the Government has sought to adopt a more challenging approach triggered by the current economic situation. The Cabinet Office has been in negotiation with Government's major suppliers and the Treasury has been speaking to PFI suppliers. In addition, in February 2011 the Treasury announced it is to pilot a review of a public sector hospital contract to identify savings and possible learning points for other projects.47
4.9 Our PFI hospitals report recommended that NHS Trusts should work with their private sector partners to identify more efficient ways of delivering services where the cost savings can be shared. The Committee of Public Accounts recommended that the Treasury, in consultation with departments, should identify how value for money tests and incentives to improve maintenance could be built into the life of PFI contracts. The requirement for buildings being maintained to high standards over the life of the contract is supposed to be a key benefit of PFI. Yet around 20 per cent of NHS Trusts were not satisfied with the maintenance service. Services such as catering and cleaning are generally subject to value for money reviews during the contract period but maintenance is not. Maintenance contractors do not face the threat of losing the contract if they are uncompetitive.
4.10 It is not just in the operating and maintenance aspects of PFI deals that better outcomes can be obtained. The underlying finance also contains opportunities for better outcomes. In 2010, we estimated that the impact of the bank crisis on projects will continue to be felt over the next 30 years. Up to £1 billion of higher financing costs are potentially locked in for the life of recent projects compared to financing rates before the credit crisis. Higher financing costs are likely to persist throughout the operating period, even though the project operational phase normally represents a lower risk for lenders.48
4.11 The Committee of Public Accounts has asked the Treasury to find ways of lowering the cost of finance in the operating period. The Treasury previously acted on our reports, and those of the Committee of Public Accounts, to improve deals by arranging with the private sector that refinancing gains would be shared. If project finance rates improve, there may be the opportunity to refinance recent projects with high financing costs to reduce the cost of the projects to the public sector. Our report on the effects of the credit crisis recommended that the Treasury should consider portfolio refinancing to increase the potential refinancing gains, in which the public sector could share. The Committee of Public Accounts has also asked the Treasury to consider whether value for money would be improved by unbundling ongoing facilities services from the long contracts inherent in the PFI model.
_________________________________________________________________________
46 Committee of Public Accounts, PFI in Housing and Hospitals.
47 See http://www.hm-treasury.gov.uk/press_22_11.htm
48 Comptroller and Auditor General, Financing PFI projects in the credit crisis and the Treasury's response.