1 The private finance initiative (PFI) is a way to finance and provide public sector infrastructure and capital equipment projects. Under a PFI contract, a public sector authority pays a private contractor an annual fee, the 'unitary charge' for the provision and maintenance of a building or other asset. The unitary charge may also cover services such as cleaning, catering and security in relation to the asset.
2 The Treasury has identified 684 contracts in England for which public authorities are currently paying unitary charges, typically over periods of 25 to 30 years. At the end of the contract, the public authority generally owns the asset. The 684 contracts are largely PFI contracts, but also include a number of other forms of public-private partnership contracts. For simplicity, we refer to all these contracts as 'operational PFI contracts', throughout the rest of the report.
3 A Treasury review, begun in February 2011, concluded that savings of at least £1.5 billion were possible over the remaining life of the operational PFI contracts, as a result of, for example, effective contract management, or more intensive use of the asset. In July 2011, HM Treasury issued detailed guidance to departments and other public bodies ('authorities') to help them identify savings in their operational PFI contracts. In April 2012, the Treasury required departments to start reporting to it on a quarterly basis from July 2012 on their progress in identifying and agreeing savings. The Treasury relies on authorities to check their own data and submit accurate information. The procuring authority retains the savings rather than returning them to the Treasury or sponsoring department.
4 By June 2013, departments had reported £1.6 billion of signed savings from operational contracts ('signed' savings are those that have formal agreement and which the departments and Treasury believe are the most certain). Most of these savings are forecast future savings, which will be realised over the remaining years of the contract, rather than immediately. In addition, departments are also reporting 'pipeline' savings which are less certain than the signed savings, but which the contracting authorities hope to turn into signed savings in due course.
5 In line with the Treasury's methodology for recording and reporting savings, we present all figures in this report in nominal terms1.
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1 Discounting to present values would result in lower values.