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Business, Public speaking, Uncategorized

National Audit Office NAO review of PFI … for Dummies


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.

Key findings

  • 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:

Bid costs

Construction risk – partly ameliorated by “mainly” fixed-price contracts.

Lifecycle risk

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

118

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…

Overall conclusion…

The public sector may be paying too much, but not much.

Their recommendations

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.

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