Good value?

New research from the Local Government Information Unit suggests PFI and PPP schemes may not represent good value for money and need to be more transparent for the sake of democratic accountability. Paul Gosling considers the evidence

Thirteen years after its initiation, it ought to be possible to regard the UK Private Finance Initiative as a mature market. In some ways it is - the National Audit Office has just produced its 50th report on PFI deals and a secondary market to refinance older contracts is now firmly established.

Yet the debate continues as to whether PFI represents good value for money. One thing is clear, that with signed PFI and PPP contracts now worth about £200bn and having released capital spending of around £40bn, it is very unlikely that much of this investment in UK public infrastructure would otherwise have been achieved.

But this is not to say that PFI provides a good return on expenditure for the client. A report recently published by ACCA - Evaluating the Operation of PFI in Road and Hospital Projects, by Pam Edwards and Jean Shaoul of Manchester University - concluded that the lack of transparency in the financial reporting of PFI schemes makes it extremely difficult to reach firm conclusions about value for money and comparisons with publicly financed projects.

The opacity is, in part, the result of using PFI to take projects off-balance sheet - in many cases, says ACCA's head of public sector technical, Andy Wynne, when the assets and liabilities should be included in the public sector accounts. In at least one instance, involving a Scottish prison, the assets and liabilities were not recorded in the books of either the public sector client, nor the private contractor.

Inevitably, this lack of transparency and accountability is made worse by the use of special purpose vehicles to provide the assets and associated services. The practical problems involved with SPVs are well illustrated by the case of Tower Hamlets schools. An SPV was established to service a £120m contract to refurbish the London borough's schools, led by Ballast Plc, financed by Abbey National Treasury Services, with some services provided by Wiltshier, a subsidiary of Ballast.

Presumably the deal looked to Tower Hamlets borough to represent a good deal. But Ballast recorded bad trading figures and was closed by its Dutch parent, along with the Wiltshier subsidiary. Separately, Abbey hit financial difficulties and left the PFI market. Despite compensation and exit payments from Abbey and Ballast, the cost to the council for completing the work on the project after the withdrawal of all its contract partners substantially increased.

It looked likely for months that leading PFI contractor Jarvis would be forced to cease trading, replicating the Tower Hamlets situation across much of the country. While Jarvis seems to have re-established itself as a smaller company and will probably relaunch under a different name, its plight should be recognised by the public sector as a warning that PFI actually remains an uncertain marketplace.

Risks

PFI aims to reduce the risk of cost or time overruns, but other risks may increase through the use of this approach.Perhaps the most serious risk for the public sector is in having to bail-out failed contractors by paying inflated prices. But, at the other end of the scale, PFI and PPP deals are accused of sometimes being very expensive. In particular, the £16bn contracts to refurbish the London Underground were described by leading transport analyst Christian Wolmar as 'a licence to print money'.

While the National Audit Office does not use such florid language, and does acknowledge the benefits of PFI, it also provides its own financial warnings. In its latest report on a PFI deal, the NAO looked at Darent Valley Hospital - where the market's recognition of the low risk associated with PFI as the sector has bedded in has allowed the contractors to refinance and extend the project's loans, realising a £37m windfall. While the NHS Trust has also benefited, it has gained by a more modest £12m through extending the life of the contract and raising its risk exposure.

The NAO concluded that while the outcome of the Darent Valley PFI contract has been 'satisfactory overall', the client might have been more determined in applying payment deductions where there had been poor performance. This demonstrates that public sector clients must not only subject the terms of PFI deals to the closest scrutiny before they are agreed, but that playing hardball does not finish when the contract is signed.

Partnerships UK has now launched a database which opens up a significant amount of information about PPP and PFI deals which was previously hidden. Welcome though this is, no one seriously believes that this puts an end to the debate on whether the contracts represent good or bad value for money.

Paul Gosling is contributing news editor of accounting & business and is a specialist public sector journalist.