Headlines: December 4th, 2001

Think ahead is the message from the National Audit Office to public bodies involved in the Public Finance Initiative. In its report ‘Managing the Relationship to Secure a Successful Partnership in PFI Projects’ it calls for a continuing move from rigid specifications to focusing on the more critical outcomes. The future is unknown and uncertain, but one certainty is that things will change and pfi contracts must take account of change which can bring better value for money. Two weaknesses identified by the NAO study are that contracts seldom provide for both parties to share in gains and that public service culture limits the freedom of contractors to introduce innovations.The cost of finance is one of the most expensive ingredients in a PFI contract and refinancing can cut the cost and increase profit by as much as 80%. Refinancing is possible because tenders are submitted on the basis of quoted interest rates from banks, but once a facility – which might be a prison, school or hospital – is built, the level of risk falls substantially. There is a significant risk of a building not being completed by its due date, or of some failure which might prevent its completion. There may also be a chance of not being able to recruit sufficient numbers of qualified and experienced workers to open a facility on time. But once the facility is built and staffed, the operators have a guaranteed market and a client who will not go bust. The NAO found that 85% of pfi contracts made no provision for contractors to share any benefits from refinancing.

A number of contractors who had high expectations of introducing innovations found that their hopes were dashed. They were thwarted by the fixed views of departments on the design features of the contracts and by a lack of flexibility on other aspects of how the service should be provided. The NAO wants contracts to be particularly flexible in relation to the use of new technology.

Link: www.nao.go.uk