4.1 The savings reported to HM Treasury to date provide insight into the types of saving that other departments might be able to identify in their own contracts and those of the bodies they sponsor.
4.2 In Part Three we note the number of contracts and total remaining unitary charge by sponsoring department. Those departments who sponsor a larger number of contracts and have a high remaining unitary charge are likely to be the ones with the greatest scope for identifying further savings.
4.3 Figure 7 shows the typical sources of savings that departments have reported to the Treasury so far. The actual savings available will vary by contract, and it is only by having a detailed understanding of each contract that the full potential for savings will be identified.
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Figure 7
Types of saving we found
Nature of saving | Description |
Asset utilisation | Improving how assets are used, such as increasing occupancy rates, as the Treasury has done in their offices at Great George Street. |
Coverage | Incorporating other services into pre-existing PFI contracts to extend coverage. The Ministry of Defence was able to extend an existing Army contract to offer support to the other two armed services, at minimal additional cost. |
Cost of finance | Exploiting the lower cost of public financing and substituting it for private finance. TfL were able to generate savings by bringing services 'in house' because of its prudential borrowing powers, coupled with early termination clauses, in some of its contracts. |
Ancillary contract clauses (not related to service provision) | Where contract elements may be generous there may be opportunities to negotiate permanent or temporary cost reductions. One department in our sample negotiated a lower inflation index rate. |
Redefining activities | Some activities can be redefined in a cheaper fashion for similar outcomes that do not affect the quality of the service. |
Exercising rights | Many contracts will have clauses that enable authorities to reclaim money from the provider. One NHS trust within our sample was proactively seeking insurance rebates from their provider. |
Hedging | Controlling escalating costs will save money. One PFI provider entered into an interest rate swap which generated savings for both the contracting authority, in this case an NHS Trust and the service provider by fixing into a lower interest rate. |
Reducing service scope | Removing services from contracts with the agreement of contractor should lead to a reduction in the unitary charge. |
Removing intermediaries | Costs can be reduced by removing intermediate suppliers, financing vehicles and management companies. TfL was able to remove intermediaries associated with two PFI deals in order to generate savings. |
NOTE
1. The Treasury has a more detailed list of 30 areas that are a potential source of savings.
Source: NAO analysis of reported savings and HM Treasury guidance
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4.4 Reductions to services or outputs were a relatively small proportion of the savings, accounting for just £178 million (13 per cent) of our sample population, see Figure 3. Below we have set out three alternatives to scope reductions that we came across in our review.