The Private Finance Initiative : sixth report, together with the proceedings of the Committee, minutes of evidence and appendices / Treasury Committee.

  • Great Britain. Parliament. House of Commons. Treasury Committee.
Date:
1996
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Licence: Open Government Licence

Credit: The Private Finance Initiative : sixth report, together with the proceedings of the Committee, minutes of evidence and appendices / Treasury Committee. Source: Wellcome Collection.

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    The analysis of value for money 32. Treasury guidance on PFI states “A critical question in deciding whether to go ahead with a PFI option is identifying best value for money. Competition is the best guarantor of value for money. As a result of the competitive process, the best PFI options should emerge. These may involve comparison with a conventionally procured alternative - the public sector comparator.”** There are, however, a series of situations when it is deemed inappropriate or unnecessary to use a public sector comparator.** Perhaps the most subjective of these is the view that if the project is suitable to go ahead as a publicly financed project, but public funds are not (or not likely to be) available in a similar timescale to the PFI project, then no public sector comparator is needed. In such a circumstance it is difficult to see the justification for describing the project as best value for money, but rather that it is the best available value for money. Comments made by the Chief Secretary to the Treasury in the course of our 1995 Budget inquiry are illuminating in this respect. He commented “We do not start from saying that there is a set amount of public provision and that PFI is on top of that. When I came into the Department in July I said that the approach I wanted to capital spend was to tell departments that they had to justify their capital spend, that we were doing what was called in old-fashioned jargon zero budgeting, and they should assume that they had no capital and then they should come back and say why they needed what they needed, why if they did need it they needed conventional public capital provision to do it and why they could not do it by PFI or in some other way.”*’ In this context for capital spending, there is a danger that PFI projects will become “best value” by default, to the overall long-term detriment to the public finances. 33. Although the testing of value for money can be approached as a systematic and impartial science, our evidence has shown that a series of subjective judgements will impinge upon the testing process. This subjectivity is reflected in some of the Treasury guidance. “Private sector bidders are exposed to the financial consequences of their bids, in a way that officials are not in respect of the public sector comparator. This will tend to make the assessment of .comparators unduly optimistic about the public sector solution.”** “The construction of a public sector comparator is not straightforward. It will typically be based on a set of hypothetical contracts to design, build and manage a public sector facility, based on recent experience of actual costs. Allowance must be made for the likelihood that out turns are usually higher than initial estimates.”°’ This guidance seems to be encouraging subjective judgements in favour of PFI projects. However, there is no a priori reason why public procurement should not run to time and cost. Indeed, many of the assumed benefits of PFI would appear to be available to better managed and controlled conventional procurement. Furthermore, there is an element of subjectivity involved in assessing and placing a cash value on the external benefits of different project options. In evidence to the Committee, Sir Christopher Bland acknowledged the difficulties in attaching cash values to external costs and benefits in project appraisal.*® 34. A related point is that the public sector has access to cheaper capital than private sector investors. The assumptions made regarding the relative costs of capital are vital to the assessment of projects to net present values. It makes intuitive sense that the cheaper capital available to the public sector should make this route of procurement best value where the project involves a large capital element. Indeed, in some cases it is conceivable that the same contractors would be performing the work. As Dr Glaister pointed out in evidence to the Committee, private options (which may require a premium of 6-9 percentage points above the gilt rate) will prove better value for money “If, and only if, they achieve lower construction costs, more efficient maintenance in the long run. ... It is accepted, I think, that the cost of borrowing will be higher but one is offsetting that against these perceived efficiency gains. 53 POPB, para.3.35 [added emphasis]. %4 Ibid., paras.3.36-3.43. °° Third Report,.Session 1995-96, Q510. 5° POBP, para.3.42. 57 POPB, para.3.39. 8 QQ159;161.