NAO urges consideration of alternatives after warning PFI may no longer suitable

The use of PFI in the current climate may not be as suitable for as many projects as it has been in the past, the National Audit Office has warned.

In its latest report, Lessons from PFI and other projects, the spending watchdog called on the Treasury and other Whitehall departments to identify alternative methods for delivering infrastructure and related facilities services in a bid to deliver maximum value for money for government.

The NAO’s key findings were:

• There is no clear data to conclude whether the use of PFI has led to demonstrably better or worse value for money than other forms of procurement
• Procuring authorities fail to specify the essential cost and operational data they require
• There is insufficient data on the returns made by equity investors for the risks they are bearing
• The lack of commercial skills to match those of the private sector can put the public sector at a disadvantage in the negotiation and management of contracts
• Because of the length and complexity of PFI procurements, there is a risk of important knowledge not being passed on when advisers or key individuals move on to other work
• Despite a range of valuable project assurance and governance processes (such as the Project Review Group for local authority projects), many specifically related to PFI, it has been rare for large projects to be halted
• Local bodies procure contracts as part of programmes managed and funded by central government. “The shortcomings in post-contract programme evaluations have meant that good practice and lessons learned have not been sufficiently identified and disseminated”
• There is a need for greater challenge of both the decision to use private finance and the scope of the deal. “The value for money case before the credit crisis was sometimes marginal. The case for the use of private finance therefore needs to be challenged, given our analysis which showed that the costs of debt finance increased by 20-33% since the credit crisis”. The fact that PFI deals are often off-balance sheet may also continue to act as an incentive to use PFI.
• With an average contract period of 25 to 30 years, PFI contracts can be relatively inflexible
• There has also previously been little opportunity for public authorities to obtain further efficiencies during these long contract periods.
• Unlike its private sector contractors, the government has not used its market position to obtain economies of scale.

The NAO said that the public sector needed to become an “intelligent customer” and so should develop the “enablers of success”. These are: collecting better data to inform decision-making; ensuring projects have the right skills; establishing effective arrangements to test, challenge and, if necessary, stop projects; and using commercial awareness to obtain better deals.

NAO head Amyas Morse said: "The public sector should make better use of the hard won lessons from the extensive and substantial PFI programme. This means acting as a more demanding and intelligent customer, by harnessing government buying power through concerted tactics and tougher negotiation"

A copy of the full report can be found here.