10. The Treasury and IPA have focussed on introducing PF2 and making changes to the private finance model as part of this, rather than looking at the much larger historic stock of 700 PFI projects, where the biggest problems persist.50 The Treasury accepted that the success of PFI projects has been a "mixed record", and told us that one of the main problems with PFI has been the "rigidity and inflexibility" of contracts and their associated long term costs.51 For example, Liverpool City Council is currently paying around £4 million each year in PFI fees for Parklands High School, which has been empty since 2014. The Council is contracted to pay a further £47 million until 2028.52 IPA told us that this is a "very unfortunate situation" but asserted that PFI expenditure only represents a very small percentage of departmental budgets.53 But inflexible PFI costs can create immense pain at a local level. For example, the National Audit Office reported in 2010 that for one Health Trust, PFI payments represented more than 20% of turnover. Pressures on public finances have increased since then, so this figure could be even higher now, given PFI payments increase with inflation.54
11. The Treasury told us that unless contracts can be terminated on a voluntary basis, which does not always provide value for money, or renegotiated, then there is not always a solution to the problem of large payments under inflexible PFI contracts.55 The Treasury told us that this is especially true in older contracts (particularly those signed before 2000), where public bodies have no other choice but to pay for an asset even if it is not being used.56 Public bodies have terminated contracts where they considered it value for money to do so. In 2017, for example, the Greater Manchester Waste Disposal Authority terminated its recycling and waste management PFI contract.57 In 2014 the Northumbria Healthcare NHS Foundation Trust terminated its PFI contract for Hexham hospital, although the IPA has expressed significant doubts about the value for money of buying out that contract.58
12. The Treasury told us that it is the combined responsibility of the Treasury, IPA and the procuring department to ensure that demand forecasts are reliable to reduce the likelihood that a new school or hospital is left empty part way through a PFI contract, as in the case of Parklands School.59 The Treasury and IPA do not actively monitor struggling PFI deals to assess whether intervention might be helpful.60 The Treasury explained that it only becomes involved when departments present a proposal to buy out a PFI contract, or to renegotiate it in a way that was novel or contentious.61 The Treasury and IPA do not, for example, look across the entire stock of PFI contracts to see if there are any contracts that would be suitable for voluntary termination.62 For example the Treasury told us it was not specifically looking at the Barts Health NHS Trust's PFI deal, where the final cost of the project will be £7 billion over the life of the contract, with the hospital trust making payments until 2049. The Trust paid £143.6 million in PFI payments in 2015 while running a deficit of over £90 million in the same period, causing significant budgetary pressures.63
13. Another problem currently affecting many public bodies relates to PFI insurance. PFI contracts require the cost of insurance to be agreed at the start of the contract. Public bodies then are entitled to share in any savings should the cost of insurance fall. However there are examples whereby private companies are deliberately withholding money owed to public bodies following a fall in insurance costs. We questioned the IPA on how they are addressing this problem and they told us it was undertaking a review of the PF2 standard contract guidance looking specifically at the costs of insurance.64 This review fails to address problems being faced in existing PFI contracts, and the full extent of this issue remains unquantified. It remains unclear what the Treasury is doing to help local bodies recoup insurance cost savings PFI providers owe them.65
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50 Q89
51 Qq 23, 89
52 Qq 92-93, C&AG's Report, Figure 1.21
53 Qq 89, 90, 92-93
54 C&AG's Report, para 2.5-2.6
55 Q 93
56 Qq 92, 93
57 Qq 89, 112
58 Q 109, C&AG's Report, para 2.20
59 Q 95
60 Qq 112-120
61 Q q 111 , 117 -11 8
62 Q q 112 - 113
63 Qq 99, 101-104
64 Q 128, C&AG's report, para 2.10
65 Q 128