1. The Private Finance Initiative (PFI) is now established as a major form of Government procurement. There are over 400 PFI contracts currently in force committing departments to future expenditure of around £100 billion.1
2. These contracts are generally long term arrangements involving public expenditure over extended periods, often for 30 years or more. To achieve value for money over the life of these contracts, the public sector clients (often referred to in this context as "authorities") will need to have a strong contractual framework allied with good relationship skills which will help them to approach projects in a spirit of partnership with their private sector partners.
3. On the basis of a Report by the Comptroller and Auditor General2 the Committee took evidence from the Office of Government Commerce (OGC) and the Major Contractors Group. The Comptroller and Auditor General's Report is based on a survey by the National Audit Office (NAO) of 121 PFI projects where contracts had been let prior to 2000. The survey results include perceptions of authorities and contractors about the early experience of how the contracts they have entered into are working out. We examined the evaluation of PFI projects in progress, how value for money can be maintained in the long term and the skills and guidance that are needed by the public sector to manage these contracts successfully.
4. This Report focuses on the early experience of PFI contracts. It is, therefore, a transitional report highlighting issues which will be important to the successful future management of these long term contracts.
5. Our key conclusions are:
• Better evaluation is needed of PFI projects in progress. There are 400 PFI contracts now in progress with many more contracts being negotiated. Departments need to analyse rigorously whether their PFI projects are delivering the quality of customer service and value for money expected when the contracts were let. The results of these evaluations should also be monitored by the OGC to enable it to refine the government's approach to the development of future PFI projects.
• Value for money needs to be maintained over the life of these long term contracts. We are very concerned that over one in five authorities consider that value for money from their PFI contracts has diminished, with high prices for additional services an area of concern. As many as 23 per cent of authorities surveyed considered that there had been a decline in value for money in PFI projects after contract letting. It is essential that PFI contracts have appropriate mechanisms in place to ensure that value for money is maintained over the lifetime of a project. Yet only around half of the contracts surveyed had such mechanisms in place. In future all contracts should have appropriate mechanisms, such as benchmarking, market testing, and open book accounting.
• Contractors should expect to lose their investment in PFI projects when things go wrong and to be rewarded reasonably when things go well. If contractors successfully manage the risks that have been allocated to them and deliver the required services then they will expect to earn rewards commensurate with the level of risk they have borne. But if they fail to manage the risks they have taken on then they should expect that part or all of their equity investment in the project may be lost. It will undermine an essential commercial discipline if contractors generally are given the impression that the Government will always bail them out, as has occurred in some individual cases, such as the Royal Armouries Museum or the Channel Tunnel Rail Link.
• Staff responsible for managing PFI projects must be equipped with the appropriate skills. Over £100 billion of public funds is committed to PFI projects, yet the OGC recognises that there are still gaps in the guidance and training on how to manage PFI projects, as distinct from how to negotiate them at the outset.
6. Our detailed conclusions and recommendations are as follows:
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1 These include all central government PFI contracts and those let by local authorities where there has been financial support from central government.
2 C&AG's Report, Managing the relationship to secure a successful partnership in PFI projects (HC 375, Session 2001 -02)