PFI Millstone

November 28, 2007 9:55 AM


Just stick your head through the hole


Anyone who's ever had building work done knows the Golden Rules of value for money:

  1. Get at least three fixed price quotes in writing

  2. Make sure they cover all the required work in full

  3. On no account alter your requirements once you've hired your builder

Simple, aren't they.

A shame that the Private Finance Initiative doesn't follow them. Especially as PFI is so much more permanent than a here today, gone tomorrow, kitchen extension. Your builder comes, builds the extension, gets paid, and leaves. But the PFI contractor comes, builds the hospital, then runs its "hotel facilities" for the next twenty five years, with taxpayers making an inflation linked payment to him every single year. Mistakes today will be a millstone round our necks for the next 25 years.


And there are now 800 of these contracts, committing taxpayers to total payments of £155 billion over the next 25 years. Which is a lot of money on which not to be getting value.


We've blogged the PFI money-pit many times (eg see here), but the Public Accounts Committee has just given its update on how things are going. And against those Golden Rules, the news is not good:


  • Since 2004 the proportion of PFI deals attracting only two bidders has more than doubled - to one-third - with the risk of no competition at all if one bidder is weak or drops out

  • One third of public sector teams made changes to PFI projects after they had selected a single, preferred bidder

  • The average tendering time for projects is nearly three years, deterring bidders and costing taxpayers more- delays to projects cost us at least £67 million

  • Prices for contracted "soft" services (such as catering and cleaning) often get increased during the contract period (by up to 14% so far- and that's on top of the inflation-linked increases already factored in)

  • Services are being reduced to contain costs- ie we're getting less for the money

And why's it such a mess?


Partly, it's because private sector suppliers increasingly wary about dealing with our indecisive, half-baked public sector (see this blog on Shunning the Simple Shopper). But more fundamentally:


"There is a continuing lack of PFI skills and expertise across the public sector, particularly in local authorities, NHS trusts, and other locally-based teams where officials are usually encountering PFI negotiations for the first time... Good negotiating skills are essential if public sector officials are to secure good deals from private sector counterparts who are usually experienced in developing and managing PFI projects."


In other words, the same old Simple Shopper story: taxpayers picking up the tab for being represented by incompetents. And we're on the hook for at least the next quarter-century.


There's one other point to highlight for future reference. During the PAC hearing, the inestimable Richard Bacon tried very hard to make the Treasury mandarins tell us how much debt PFI now represents. This is something we've wrestled with on BOM, but it has been treated by HM Treasury and Brown as a state secret, shrouded in Enron accounting obfuscation.


Here's the transcript of how Bacon got on:


Q101 Mr Bacon: I have been trying for several years to get to the bottom of how big is PFI, and it seems to be quite difficult to get an accurate answer. I have been told by various people, including by the National Audit Office, answers such as, “Well, really they do not know.”... you must have some notion of what is the likely amount of debt to arise there from going forward?


Mr Pocklington: The total stock of PFI projects has a capital value of approximately—

Q102 Mr Bacon: We have been through that. £54.55 billion, although if you look on your website it is actually now £58.067 when I printed that off this afternoon, so it has gone up by about £4 billion since you sent your note in...

Mr Pocklington: Table C19 from the Budget document includes our latest estimate for the years 2006-07 to 2033-32 on an annual basis.

Q108 Mr Bacon: If you add it all up what do you get?

Mr Pocklington: We have not published a number and I am afraid I am not able to add them up here...

Q111 Mr Bacon: Mr Pocklington, can you just give me, because funnily enough I have got a calculator, the numbers please?

Mr Pocklington: From 2007-08?

Q112 Mr Bacon: Yes, read them out. I will put them straight into my calculator and this will save us time.

Mr Pocklington: 7.3, 7.8, 8.2, 8.5, 8.6, 8.7, 8.8. etc etc

Q120 Mr Bacon: That comes to £157.9 billion. Is that then a rough proxy for the answer to my first question, Mr Stewart?

Mr Stewart: I think that is the liabilities accruing under PFI.

Q121 Mr Bacon: That is what I am interested in.

Mr Stewart: That is not equivalent to the debt.

Q122 Mr Bacon: Right, so the debt is something different?

Mr Stewart: The debt relates to the capital element so the unitary charges include payments for soft services.

Following the meeting, HMT eventually came up with this Sir Humphryesque statement:


"The total, if one were to add together these future and non-comparable figures without applying any appropriate adjustments, would be £170.8 billion. However, I must emphasise, as I already have to the Committee and to Mr Bacon, that this number has no meaning. To add together a figure in today’s money to a figure in the money of 2030, without making any adjustment for the changing value of money over time, produces a nonsensical number.


A more meaningful exercise would be to take the stream of future payments set out in the table and to aggregate them as a net present value. If one were to do this one would end up with total future payments under the PFI measured in today’s money which aggregate to £91 billion. The discounting methodology applies the Green Book rate of 3.5% to account for time preference and a discount of 2.8% to account for inflation. These two elements are compounded to give an overall discount rate of 6.4%. The inflation figure of 2.8% is HM Treasury’s projection for RPI inflation consistent with CPI inflation remaining at its 2% target."


So now we know. According to HMT, PFI debt may amount to £91bn (although since that ignores all payments beyond 2031-32, we should probably call it £100bn). That compares to BOM's most recent calculation of £90bn, and our updated guesstimate of £100bn. Looks like HMT has cribbed our figures. If they want any more help, we'd be glad to oblige.



PS The CBI has also commented on the poor contracting skills of public sector PFI clients: "In a survey of PFI contractors, the business lobby group found that changed orders, delays and added costs were common. In answer to a question as to what respondents' companies have experienced from the PFI, 69% said they had experienced changed specifications by the contracting authority before contracts were signed; 49% said they had experienced changed specifications by the contracting authority after contracts were been signed; 78% said they had experienced avoidable delays on the part of the procuring authority; and 76% said they had experienced higher than expected bid costs."


Just stick your head through the hole


Anyone who's ever had building work done knows the Golden Rules of value for money:

  1. Get at least three fixed price quotes in writing

  2. Make sure they cover all the required work in full

  3. On no account alter your requirements once you've hired your builder

Simple, aren't they.

A shame that the Private Finance Initiative doesn't follow them. Especially as PFI is so much more permanent than a here today, gone tomorrow, kitchen extension. Your builder comes, builds the extension, gets paid, and leaves. But the PFI contractor comes, builds the hospital, then runs its "hotel facilities" for the next twenty five years, with taxpayers making an inflation linked payment to him every single year. Mistakes today will be a millstone round our necks for the next 25 years.


And there are now 800 of these contracts, committing taxpayers to total payments of £155 billion over the next 25 years. Which is a lot of money on which not to be getting value.


We've blogged the PFI money-pit many times (eg see here), but the Public Accounts Committee has just given its update on how things are going. And against those Golden Rules, the news is not good:


  • Since 2004 the proportion of PFI deals attracting only two bidders has more than doubled - to one-third - with the risk of no competition at all if one bidder is weak or drops out

  • One third of public sector teams made changes to PFI projects after they had selected a single, preferred bidder

  • The average tendering time for projects is nearly three years, deterring bidders and costing taxpayers more- delays to projects cost us at least £67 million

  • Prices for contracted "soft" services (such as catering and cleaning) often get increased during the contract period (by up to 14% so far- and that's on top of the inflation-linked increases already factored in)

  • Services are being reduced to contain costs- ie we're getting less for the money

And why's it such a mess?


Partly, it's because private sector suppliers increasingly wary about dealing with our indecisive, half-baked public sector (see this blog on Shunning the Simple Shopper). But more fundamentally:


"There is a continuing lack of PFI skills and expertise across the public sector, particularly in local authorities, NHS trusts, and other locally-based teams where officials are usually encountering PFI negotiations for the first time... Good negotiating skills are essential if public sector officials are to secure good deals from private sector counterparts who are usually experienced in developing and managing PFI projects."


In other words, the same old Simple Shopper story: taxpayers picking up the tab for being represented by incompetents. And we're on the hook for at least the next quarter-century.


There's one other point to highlight for future reference. During the PAC hearing, the inestimable Richard Bacon tried very hard to make the Treasury mandarins tell us how much debt PFI now represents. This is something we've wrestled with on BOM, but it has been treated by HM Treasury and Brown as a state secret, shrouded in Enron accounting obfuscation.


Here's the transcript of how Bacon got on:


Q101 Mr Bacon: I have been trying for several years to get to the bottom of how big is PFI, and it seems to be quite difficult to get an accurate answer. I have been told by various people, including by the National Audit Office, answers such as, “Well, really they do not know.”... you must have some notion of what is the likely amount of debt to arise there from going forward?


Mr Pocklington: The total stock of PFI projects has a capital value of approximately—

Q102 Mr Bacon: We have been through that. £54.55 billion, although if you look on your website it is actually now £58.067 when I printed that off this afternoon, so it has gone up by about £4 billion since you sent your note in...

Mr Pocklington: Table C19 from the Budget document includes our latest estimate for the years 2006-07 to 2033-32 on an annual basis.

Q108 Mr Bacon: If you add it all up what do you get?

Mr Pocklington: We have not published a number and I am afraid I am not able to add them up here...

Q111 Mr Bacon: Mr Pocklington, can you just give me, because funnily enough I have got a calculator, the numbers please?

Mr Pocklington: From 2007-08?

Q112 Mr Bacon: Yes, read them out. I will put them straight into my calculator and this will save us time.

Mr Pocklington: 7.3, 7.8, 8.2, 8.5, 8.6, 8.7, 8.8. etc etc

Q120 Mr Bacon: That comes to £157.9 billion. Is that then a rough proxy for the answer to my first question, Mr Stewart?

Mr Stewart: I think that is the liabilities accruing under PFI.

Q121 Mr Bacon: That is what I am interested in.

Mr Stewart: That is not equivalent to the debt.

Q122 Mr Bacon: Right, so the debt is something different?

Mr Stewart: The debt relates to the capital element so the unitary charges include payments for soft services.

Following the meeting, HMT eventually came up with this Sir Humphryesque statement:


"The total, if one were to add together these future and non-comparable figures without applying any appropriate adjustments, would be £170.8 billion. However, I must emphasise, as I already have to the Committee and to Mr Bacon, that this number has no meaning. To add together a figure in today’s money to a figure in the money of 2030, without making any adjustment for the changing value of money over time, produces a nonsensical number.


A more meaningful exercise would be to take the stream of future payments set out in the table and to aggregate them as a net present value. If one were to do this one would end up with total future payments under the PFI measured in today’s money which aggregate to £91 billion. The discounting methodology applies the Green Book rate of 3.5% to account for time preference and a discount of 2.8% to account for inflation. These two elements are compounded to give an overall discount rate of 6.4%. The inflation figure of 2.8% is HM Treasury’s projection for RPI inflation consistent with CPI inflation remaining at its 2% target."


So now we know. According to HMT, PFI debt may amount to £91bn (although since that ignores all payments beyond 2031-32, we should probably call it £100bn). That compares to BOM's most recent calculation of £90bn, and our updated guesstimate of £100bn. Looks like HMT has cribbed our figures. If they want any more help, we'd be glad to oblige.



PS The CBI has also commented on the poor contracting skills of public sector PFI clients: "In a survey of PFI contractors, the business lobby group found that changed orders, delays and added costs were common. In answer to a question as to what respondents' companies have experienced from the PFI, 69% said they had experienced changed specifications by the contracting authority before contracts were signed; 49% said they had experienced changed specifications by the contracting authority after contracts were been signed; 78% said they had experienced avoidable delays on the part of the procuring authority; and 76% said they had experienced higher than expected bid costs."

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