Your browser is no longer supported

For the best possible experience using our website we recommend you upgrade to a newer version or another browser.

Your browser appears to have cookies disabled. For the best experience of this website, please enable cookies in your browser

We'll assume we have your consent to use cookies, for example so you won't need to log in each time you visit our site.
Learn more

NAO warns on high costs of private finance

  • 1 Comment

Public sector contract mangers need improved skills and should enjoy incentives to secure maximum value for money from contractors.

Those are among recommendations from a study by the National Audit Office of lessons from private finance initiative projects.

It warned that pro-PFI pressure could continue from HM Treasury because “it often leaves liabilities off the national balance sheet”, even though the credit crunch had increased financing costs by up to 33% and the auditors found “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”.

One factor in PFI’s questionable value to public bodies lay in “The lack of commercial skills to match those of the private sector [which] can put the public sector at a disadvantage in the negotiation and management of contracts.

Public bodies undertaking procurement should “ensure that there are suitably experienced contract managers prepared to robustly challenge contractors [and who are] incentivised and held to account for maximising value for money”.

The NAO also found the government had failed to use its buying power to drive economies of scale, leaving too much to local deals.

“While this encourages local decision-making, local bodies are not well placed to use the government’s buying power on common services such as catering, cleaning and building maintenance,” it said.

Mark Hellowell, a specialist in PFI issues at the University of Edinburgh, said: “This is the most critical report on PFI that I’ve seen from the NAO. It says there is no evidence that PFI offers better value for money.

“But local government may find its recommendations run counter to localism because it looks to standardised procurement at central level.”

Mr Hellowell added: “Governments always say they will do something about civil service expertise but the public sector commercial skills almost always run behind those of the private sector so value for money is always at risk.”

NAO head Amyas Morse said the public sector should become “a more demanding and intelligent customer, by harnessing government buying power through concerted tactics and tougher negotiation”.

Tim Care, a partner in Newcastle law firm Dickinson Dees, who specialises in PFI work, said the NAO’s conclusion on the desirability of using centralised government buying power “does beg the question as to how that sits alongside localism”.

He said: “I think this is a real challenge for government. It needs to design procurement processes that allow local decision-making, but based on centralised programmes where as much as possible is driven from the centre in order to maintain consistency and drive a harder bargain with the private sector.

“I don’t think it is necessarily the case that no PFI scheme has been able to drive a hard bargain, but there has been no consistency at all.

“It should not be beyond the wit of man to compile robust data from existing schemes and build up a knowledge bank that will greatly help new schemes coming to the market and also existing schemes that might be negotiating variations or value-testing.”

The Chartered Institute of Purchasing and Supply said it would be important to build sufficient flexibility into contracts to enable intelligent change management over their terms, which can be up to 30 years.  

“Purchasers and contract managers need to be involved in the design process of complex projects as they can have a valuable input into service design,” a spokesman said.

“Procurement teams are often excluded from the initial design process and this often results in poorly designed input specifications rather than outcome based service design. 

“Contracts should encourage innovation by the intelligent use of clear service levels and key performance indicators that reward contractors rather than inflict penalties.”   

  • 1 Comment

Related files

Readers' comments (1)

  • davy jones

    PFI is one of the biggest public sector scandals of all time - when people look back in years to come, they will wonder how on earth we got conned into paying massively over the odds for these projects on contracts that are almost universally inflexible.

    Unsuitable or offensive? Report this comment

Have your say

You must sign in to make a comment

Please remember that the submission of any material is governed by our Terms and Conditions and by submitting material you confirm your agreement to these Terms and Conditions.

Links may be included in your comments but HTML is not permitted.