26 July 2002
A wide-ranging review has been conducted by the department's officials, and their proposals for rewriting the so-called 'green book' have been outlined in a consultation document, launched by Chief Secretary to the Treasury Paul Boateng on July 24.
The paper explicitly links the need for reform to the extra billions in public spending unveiled by Chancellor Gordon Brown last week. The green book applies to all government investment, whether PFI or conventional procurement is used.
'The main driver of change is the need for a longer-term view of policy, programme and project proposals, which is consistent with the substantial increase in public investment now taking place,' the document says.
Treasury mandarins identify four main reforms that they believe will lead to a more evidence-based approach to investment decisions.
The most significant is a change in the discount rate. It is one of the most important elements in determining the outcome of public sector comparators, the value-for-money studies which decide whether a PFI project is more efficient than the conventional procurement alternative.
When comparing competing project proposals, it is used to calculate the relative value of costs and benefits, depending on when in the lifetime of the project they occur. At the moment the discount rate is 6% per year in real terms: this means that the fee a department is willing to pay to achieve a particular benefit is reduced for each year until the benefit is delivered.
The consultation paper proposes reducing the discount rate to 3.5% annually to take account of delivery times. It suggests identifying and calculating separately the other elements currently included in the discount rate, such as risk.
Critics of PFI argue the current discount rate means that assessments of projects such as school building programmes, where the costs are upfront but benefits are spread over a long period, tend to favour PFI rather than conventional procurement.
Matthew Taylor, the Liberal Democrats' Treasury spokesman, told Public Finance that this could help iron out this out. 'Cutting the discount rate to a much more reasonable level will create a more level playing field. It will sharpen competition by forcing the private sector to change the sorts of bids that they make for projects,' he said.
The document proposes taking greater account of departments' tendency to underestimate costs and delivery times, by using an 'optimism bias' to adjust the calculations made.
It suggests reforming the cost-benefit analysis process to give greater weight to possible benefits and less emphasis on financial costs than previously. In addition, officials want to see the tax liabilities implicit in project proposals to be factored into cost analyses. Currently these are run on a gross basis.
The consultation period will run until October.
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