(iii) 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. Yet only around half of the contracts surveyed had mechanisms for ensuring continued value for money over the lifetime of the project such as benchmarking and open book accounting. All contracts should have appropriate mechanisms in future.
(iv) The survey showed a very low proportion of authorities, just 15 per cent of those surveyed, with arrangements to share in refinancing gains. Refinancing can give rise to excessive returns to the private sector from PFI deals, beyond even the private sector's reasonable expectations. The OGC should introduce its new guidance on refinancing as quickly as possible to ensure that authorities have contractual rights to share in refinancing gains.
(v) PFI contracts often contain specific procedures for the parties to vary the deal, and 55 per cent of authorities with such change procedures had already used them in the early years of their PFI contracts. Long term contracts must provide room for flexibility in the face of changing circumstances. But concern has arisen over high charges for additional services, suggesting that authorities need to watch that change procedures are not abused as a covert means for increasing the profit margins of the contractors.
(vi) The fact that 58 per cent of authorities with a performance review process had made performance deductions from payments due to PFI contractors suggests many authorities are not getting the service they require. If bids are priced on the assumption that actual performance will fall short of the required level, then contractors may not have a strong incentive to perform well. It is up to departments to ensure that their PFI contracts do not accommodate persistent under-performance.
(vii) The transfer of risk inherent in a PFI deal cannot protect the authority from the risk that the private sector simply fails to deliver what may be a key public service. It is essential that the authority actively manages this ultimately untransferable business risk.
(viii) The essence of PFI deals is that the private sector contractor should take appropriate risks in return for appropriate rewards (such as the risk on volume of users in return for a share of user revenue). It is not for the public sector authority to insulate the contractor from the consequences of the risks it has been paid to take on. The public sector should certainly not reward private sector failure by agreeing to reduce the risk of the contractors losing their equity investment when the private sector has not delivered, as occurred in the case of the Royal Armouries and the Channel Tunnel Rail Link.3
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3 C&AG's Reports: The Renegotiation of the PFI-type Deal for the Royal Armouries Museum in Leeds (HC 103, Session 2000-01); The Channel Tunnel Rail Link (HC 302, Session 2000-01)