NAO casts doubt on value of PFI schemes

7 Jun 07
Four out of nine Private Finance Initiative schemes fail to achieve good value for taxpayers with their facility services, the National Audit Office has found.

08 June 2007

Four out of nine Private Finance Initiative schemes fail to achieve good value for taxpayers with their facility services, the National Audit Office has found.

The watchdog's June 6 report, Benchmarking and market testing the ongoing services component of PFI projects, examined the outcome of the periodic tests used to ensure charges for services such as cleaning and catering are competitive.

It found that contractors initially requested price increases of up to 19% above inflation and that in four out of nine exercises examined in detail, value for money was 'uncertain'.

'It is important that public officials test the cost and quality of facilities services to get value for money during the life of a PFI contract,' said auditor general Sir John Bourn. 'In particular, [they] must have the necessary skills, must promote vigorous competition when value testing, and they must have a full understanding of whether and how the private sector's price and service proposals offer value for money.'

Around half of the 500 PFI projects in operation are set to undergo value testing – typically every five years, either through benchmarking or market testing.

In 2006, the Treasury issued revised guidance saying market testing was the preferred mechanism for new deals and set up an operational taskforce to guide authorities. A spokesman told Public Finance that this was already 'providing invaluable support to authorities across a range of issues… ensuring that the taxpayer continues to receive value for money.'

The NAO examined 11 value-testing mechanisms in detail. Two schemes have yet to complete the process, and negotiations led to actual price changes of between –2% and +16% in the other nine. These changes were in addition to annual inflation.

Some authorities also reduced the service specification to keep the price affordable. The NAO said it was 'too early' to judge whether this had led to a deterioration in services.

Three of the four 'uncertain' projects were in the NHS, and the NAO's report came as Department of Health figures revealed that its planned PFI programme had been cut by about a third, or £4bn, following affordability reviews.

The cuts are being made by axeing four projects and downsizing others. The move follows concerns that long-term PFI commitments are incompatible with the uncertainty caused by hospital choice and competition and the move to promote more out-of-hospital care.

Although NHS contracts were highlighted as case studies, the report stated that it also had concerns over the guidance given to departments by the Treasury.

PFI schemes whose tests showed 'uncertain' value for money

University Hospital of Durham Although the price for 'hard facilities management' services decreased by 18%, the soft FM price increased by 21% above inflation. The NAO said the benchmarking process was done on the basis of anonymised data provided by the contractor and was of uncertain reliability.

Debden Park High School The contractor originally requested a net 25% price increase, which was negotiated down to 14%. The NAO said this price increase was 'significant' and noted that there had also been a 'possible reduction in service standards'.

Sussex Partnership NHS Trust The trust struggled to find other mental health PFI comparators for benchmarking, so had to resort to market testing and eventually decided to bring services in-house. The NAO said VFM was 'uncertain' as the trust had not quantified the risks of in-house provision.

Queen Elizabeth Hospital, Greenwich The hospital went through a market testing process resulting in a 6% price increase — the highest of the hospital projects examined, although the trust believed this might have been higher still had it used benchmarking. The incumbent won the market test and at least one potential supplier dropped out because a 'right to match' clause allowed the incumbent to match the preferred supplier in the market test.

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