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Public sector 'can't run PFI projects'

02/09/2008

Public sector authorities are mismanaging project contracts with private companies due to their lack of commercial expertise, MPs have admitted.

The public accounts committee says many private finance initiatives (PFIs) are badly overseen, with many changes not being put out to competition.

"Whether a PFI contract constitutes good value for money for the taxpayer depends not only on the terms of the deal originally struck with the private sector, but also on how well that contract is subsequently managed by the public sector authorities over the next 25 to 30 years," said Edward Leigh, committee chairman.

"The evidence is that many public sector authorities are not doing a good job of managing operational PFI deals.

"Many contract managers do not have enough commercial expertise and the management of the contract is frequently not sufficiently resourced."

PFIs have been a favourite of the New Labour government since they came into power, not least of all because they embodied Tony Blair's belief in the third way – the channelling of private sector success into public good.

Under PFI schemes, the public sector enters into long-term contractual obligations with private sector companies to design, build, finance and operate assets such as schools and hospitals.

Many observers say the original contracts are insufficiently competitive, with the public sector often paying over-the-odds for the project. But today's report focuses on value in changes made to the projects.

With many of the operations lasting up to 30 years, changes to the services and assets become all-but-inevitable. In 2006 alone, some £180 million was spent on changes.

MPs are calling for major contractual changes worth over £100,000 or more to be competitively tendered. Changes at that level accounted for 90 per cent of the total value of changes made to PFI projects in 2006.

Nearly 30 per cent of major changes which could have been competitively tendered were not.

"Public sector authorities must keep the incumbent private sector contractors on their toes by, wherever appropriate, making proposed changes costing over £100,000 subject to competition," Mr Leigh continued.

"The authorities should refuse demands by the private sector to pay unjustified additional fees for processing change requests.

"And the public sector needs centrally provided guidance on what prices are reasonable for common minor changes to projects."

Matthew Sinclair, policy analyst at the Taxpayers' Alliance, said the report confirmed government projects' "lamentable" record of failure.

"Our research shows that they come in on average one third over budget, meaning that a vast amount of taxpayers’ hard-earned money is going down the drain," he added.

"Officials often lack the expertise and experience needed to manage complex capital procurement, and that can be most telling when changes need to be made to the specifications."

There are currently over 500 PFI contracts operating in the UK, with a combined capital value of £57 billion and future payments amounting to £181 billion.