National Audit Office NAO review of PFI … for Dummies
The report is clearly intended to study value for money and focusses on Investors, rather than Contractors – although these may be the same.
It says it asks three crucial questions:
If Investors make the services better.
If Investors actually do take risk.
If the returns are reasonable.
- Investors played a key role in creating teams which have “contributed to a good delivery record”
Comment: The Government is currently running 206 major projects worth £400bn. More than half are running over time and over budget.
- There is a “reputation risk” presumably to the Government and also the industry, when the Investor makes additional profit when the ‘risk period’ has ended.
Comment: reputation risk seems to mean PR risk. The media is even more sensitive than normal to “additional profit”
- ‘Real’ risks are:
Construction risk – partly ameliorated by “mainly” fixed-price contracts.
Unpredicatable risk – inflation, insurance, disputes etc – ameliorated by “repeat projects” – or the growing maturity of the industry.
Returns on 118 projects
36 (30%) “Significant improvement” in predicted rate of return
48 (41%) Equal to, or better than predicted rate of return
34 (29%) Below predicted rate of return
So Investors haven’t done well in 29% of projects.
Comment:So PFI risks ARE real, and surely must be taken into account?
Projects that delivered higher returns were often in the early phase of PFI when risks were unknown and refinancing was common.
Lost all investment, or “injected more money to save a project” – “relatively few”
Comment:Disappointing lack of detail here because the consequences are significant.
Why PFI may be more expensive than necessary
Long, expensive procurement – not under the Investors control
Investors set “general” equity cost – do not reflect low risk of Government projects
Lenders require high Investor returns through “cover ratios”
When they studied 3 projects in more detail they couldn’t justify 1.5 to 2.2% of the authorities payments in terms of the “real” risks.
Authorities, they say, aren’t good enough at spotting this…
The public sector may be paying too much, but not much.
You can sum sum up their recommendations to Authorities as “understand the process better” or “get smarter.”
And there’s a sting… The public sector should learn from the PFI industry how to run a procurement and apply them to publicly funded projects.
Comment: it is reasonable to note that reports like this compare reality with an ideal. It would be more useful to compare PFI projects with non-PFI projects.