10 November 2006
The Treasury has issued new guidance in an attempt to end the naïve 'innocence' of early private finance initiative deals that have allowed companies to use their own prices as value for money benchmarks.
Benchmarking and market testing guidance responds to a critical Treasury report earlier this year which found that contract provisions allowing for the costs of 'soft' facility services, such cleaning and security, to be periodically benchmarked against alternative providers were not working. Problems emerged because the public sector did not have the information it needed to scrutinise the contractor's claims.
Andy Carty, head of the Treasury's PFI Taskforce and chief operating officer of its agency Partnerships UK told Public Finance that the 'lack of clarity' over how soft services should be value tested – either through benchmarking or a more robust but time-consuming re-tendering exercise – was becoming ever more urgent as over 100 operational PFI deals were now due to undertake such an exercise over the next year.
Until now, few PFI deals had reached that point – usually 5 to 7 years into operation. But of those that had, a number of PFI companies had simply used the price they had established in other contracts as the 'benchmark' against which to judge whether the tested prices are good value, said Carty.
'It showed a slight innocence in the early deals,' he told PF. 'People have said it's a bit obvious that shouldn't happen, but actually some companies have been doing that, I don't think it was out of malevolence, but obviously that's not what we see as a correct benchmark. It's a conflict of interest issue.'
Whilst the guidance asserts that PFI companies should lead any value testing exercise, it states that authorities should equip themselves with their own comparative cost data and ensure the allow sufficient time and resources to properly scrutinise the company's claims for price rises.
However, Carty warned that authorities needed to be aware that the outcome of a value testing exercise could still be an increase in unit costs. They needed to be satisfied that any cost increases were both good value but also affordable. If they were not affordable, the scheme and services would have to be rescaled. 'That's a reality that has to be faced. Accepting that up front, as a possible out come, is something authorities have to be aware of,' he said.
The guidance also instructs authorities to be particularly wary of how overhead costs are factored into comparative unit costs. Some PFI companies had been reluctant to share their true overhead costs, but authorities need to demand access. 'If someone lobs in a 5, 10 or 25% overhead, you need to know what it's for,' said Carty. 'And if it's bumph – and it usually isn't – they should explain.'
Where PFI companies refused to share overhead data or could not agree with authorities on benchmark data, the authority should enforce a re-tender of the services concerned, the guidance advices.
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