The announcement by the chancellor of a new 'son of PFI' in the Autumn Statement brings potential benefits for the public sector. But there are also a number of real risks
So, after the long wait and all the hype, we now know what the son of PFI looks like. Is it all that different and will it lead to a resurgence in private finance projects?
On balance this is a shot in the arm, not just for the public sector which is crying out for funds to invest in new infrastructure, but also for the private sector which wants to see a pipeline of projects emerge.
Some of the old criticisms have been dealt with but there are still problems that will not go away quite as easily. The government must pay heed to those and make sure it doesn’t fall into the old traps.
On the plus side, the proposal to allow the public sector to take equity stakes in projects is to be applauded. In many sectors (such as LIFT and Building Schools for the Future) true partnerships have been created where local authorities and NHS Trusts have a financial stake.
We have also seen the emergence of Local Asset Backed Vehicle (LABV) schemes, which are often set up as true 50/50 joint ventures. This is what the last ‘P’ on PPP is all about and, in my experience, it really works.
When the public sector has an equity stake it has to start thinking differently; it has to understand the risks that sit alongside the equity investment and work with its partners to minimise those risks and deliver an efficient project.
Of course, whilst the chancellor’s spin on this is that the public sector can enjoy a share of the profits, the key word here is actually ‘risk’. Much has been said over the past two years or so about excessive profits, but no-one has mentioned the many PFI schemes where the equity investors have had to put their hands in their pockets or accept a lower return in order to salvage a badly performing project. That is when risk transfer comes into its own.
The public sector will have to get used to a different mind-set when it takes a stake and may have some difficult decisions to make when projects do start to go wrong.
The chancellor also tells us that soft services (like cleaning and catering) will no longer be part of PFI projects. While some contractors may mourn the loss of this income, I can’t help thinking that this is a good thing.
I have seen soft facilities management add great complexity and cost to procurements and contracts and there is no doubt that some authorities have been caught out, as they realise (often too late) that they are stuck in long-term contracts with little flexibility.
Of course, as the public sector continues to review how best to deliver its services, there will be plenty of opportunities for the private sector to pitch for this work, without having to become involved in long and costly PFI bids.
As predicted, the chancellor has also hit out at the time it takes to run a PFI procurement and he wants to see timetables capped at 18 months. I applaud the motive, but I’m not sure of the means. Over the years I have seen many reasons for delayed procurements and most of them will not be fixed by setting a time limit. Here is what needs to happen.
First, the public sector must realise that no scheme should go out to the market until it is ready. That sounds obvious, but is rarely the case. Only those schemes where the authority knows exactly what it wants will adhere to a strict timetable.
Second, there must be no government policy changes which derail the process half way through. I have lost count of the number of times that an announcement about changes to the national curriculum or the withdrawal of services from an NHS Trust have forced authorities to rethink their projects half way through the procurement process.
And third, PF2 must be allowed to settle down, without tinkering. Over the course of PFI it has always been the case that as both the private and public sectors get used to the documents and the process, it becomes quicker, easier and cheaper. But there has always been a change lurking around the corner, designed to put the process back and start another learning curve. Stop the tinkering and you will see continuous improvement.
Transparency is another key message from the Treasury and I welcome this. In the brave new world of open data and open government, the private sector is just going to have to get used to publishing full details of its performance and profit. Without doubt, it is only with real transparency that we can get full accountability for our public services and the tools to help us improve those services.
Finally, we are hearing great things about the savings that the Treasury is managing to find in existing PFI schemes. Here I am a little cautious. True, every authority is looking hard at ways to save money in PFI, but I am not convinced that it has been as successful as the Chancellor makes out.
Many so-called savings are actually attempts to control rising costs and so shouldn’t really count. Other savings are made at the expense of a cut in service levels or de-scoping the project; and most savings require expenditure as authorities try to negotiate changes to projects (resulting in advisers’ and funders’ costs) or increase their contract management (which requires investment in staff).
I don’t doubt the value of continuing with these reviews and squeezing out whatever savings are available, but I am sceptical that the overall benefit is as large as we are told.
Tim Care is a partner in public services at law firm, Dickinson Dees
