THE PRIVATE FINANCE INITIATIVE AND PUBLIC PRIVATE PARTNERSHIPS
An Enquiry by the Scottish Parliament
Evidence from the Association of Chartered Certified Accountants
November 2001
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to have been asked to provide evidence to the Finance Committee as part of the Scottish Parliament's enquiry into the Private Finance Initiative and Public Private Partnerships.The Private Finance Initiative (PFI) and Public Private Partnerships (PPP) have been shrouded in controversy. For example, the Skye Bridge, one of the first PFI projects, has been subject to sustained local opposition. Opinion is at best divided on the value of using PPP to improve the quality of public services. In a recent survey, by the magazine Public Finance, only one in ten senior public sector finance managers expressed strong support for the statement that:
'PFI and other forms of Public-Private Partnerships are having a beneficial effect on public services'.
James Stuart, Chief Executive of Partnerships UK, admitted last month that the Government faces an uphill task in convincing the public of the need for PFI deals.
Whether using PPP will ensure value for money is still largely a political rather than professional opinion as there is so little evidence of the outcome of such agreements. In a recent report, the Audit Commission stated that it was 'too early to say whether PFI contracts generally offer the public sector long-term value for money'. The often-quoted Arthur Andersen/London School of Economics study (2000) is flawed as it is based on exercises to compare the costs of PFI and direct provision where it was believed that only if the PFI option were shown to be cheaper would approval be gained for the projects. Thus the aim of each exercise was to show that the PFI option would provide value for money.
The UK government is, however, convinced that 'the private and voluntary sectors can play a role…[and] where use of them can improve public services, nothing should stand in the way of their use' (Tony Blair 16 October 2001). As a result, in the short-term at least, PPPs are often the 'only show in town', in that it is only by these approaches that the necessary approval for capital investment will be gained.
There may be alternatives which would allow publicly funded capital investment and these may be worth exploring. One possibility would be to use public funds for one aspect of a development and to use PFI/PPP for other aspects. We are not aware of any work which has been undertaken in this area.
The Scottish Parliament may consider that it is worth making the case for it to be given greater freedom to fund direct public sector capital investment. The Commission on Public Private Partnerships (July 2001) commented that there should be 'an evidenced based approach to policy. A commitment is necessary to pilot, monitor, and systematically evaluate a spectrum of partnership arrangements. Depending on the evidence that emerges PPP could be rolled out or rolled back'.
As a result of the current usage of PFI and PPP, they will remain a significant feature of public finance for some years to come regardless of whatever future changes of policy which may occur. In this situation it is important that they are managed efficiently. The remainder of this paper considers certain aspects of the management of private provision of public services which we believe are particularly significant.
Management of the Private Finance Initiative and Public Private Partnerships
The Private Finance Initiative and Public Private Partnerships
1. Organisations should develop clear criteria on whether PFI/PPP is the correct approach for each project. These criteria should include the social and environment aspects of the project. The criteria should then be monitored throughout the procurement process and the life of the project to ensure that agreed objectives and success criteria are actually achieved. The results of this exercise should then be used to inform future decisions on the most suitable approach for investment in public services.
Length of time taken to sign contracts
2. The time taken to sign PFI/PPP contracts can be considerable. The procurement process is long and complex and requires a great deal of senior management time. The Audit Commission found that the average time to complete a PFI deal was over two years. Public sector organisations will have to wait three to four years (at a minimum) before PFI/PPP schemes are operational.
3. Purchasers should ensure that more than one contractor remains in the procurement process for as long as possible. The Audit Commission recommends that purchasers should avoid being in exclusive negotiation with only one contractor for more than nine months.
4. If purchasers are to reduce the length of time taken to close PFI deals they should:
- demonstrate a clear purpose and a strong vision of the desired outcomes of the scheme
- translate that vision into a simple output specification and resist the temptation to make regular changes to the specification
- get early commitment to the scheme from key stakeholders
- set up a project management structure which allows for an appropriate level of delegation to key officers and is integrated with existing decision making processes
- agree a clear project plan, establish project milestones and monitor progress against the plan on a regular basis
- agree the key contractual terms, including payment mechanisms and risk transfers, prior to issuing the invitation to negotiate in order to force bidders to indicate their position early on in the negotiation process
and - be clear about how they are going to evaluate bids.
Sensitivity and Flexibility
5. All PFI/PPP proposals should be subjected to sensitivity analysis to see whether different assumptions, for example about different forms of risk allocation, would significantly alter the value for money assessment. These projects are particularly sensitive to the discount rate used. None of the first 11 PFI schemes in the NHS would have been considered to provide value for money if a discount rate of 4%, rather than 6%, had been used in their evaluation.
6. PFI/PPP contracts are often long term deals and even the shorter contracts for services such as IT and communications commit substantial future funds. It is essential that contracts provide the public sector with enough flexibility to take advantage of changes in circumstances, technology or other improvements to service delivery which may become available during the contract period. All PFI/PPP contracts should, for example, have explicit provisions for sharing super-profits arising from re-financing deals. A number of PFI/PPP have not been successful, for example the provision of IT systems at the Passport Office and in magistrate offices. It is necessary to ensure that suitably detailed contingency plans are developed to avoid the public sector bearing the costs of potential private sector failure.
Developing and maintaining public sector expertise
7. There are relatively few private sector firms which are actively involved in PFI/PPP projects compared with the number of public sector organisations using this approach. As a result, it is important that the experience of managing PFI/PPP projects is identified and made available to other public sector organisations. Without this the private sector may have a significant advantage during the lengthy and complex procurement process.
8. The National Audit Office has stated that:
'There is no substitute for the knowledge that is acquired while developing and negotiating a PFI deal. The public sector needs to retain staff with experience of PFI deals and to use there experience on future deals'.
9. Teams of management advisors should be established centrally and be made available to work with organisations managing PFI/PPP projects. Across the public sector the status and career structure of procurement officers should be significantly enhanced.
Making partnerships accountable
10. Accountability has always been a key aspect of public services. The involvement of private and voluntary providers in public service delivery should not lead to a dilution of public accountability. A number of steps should be taken to ensure that this goal is achieved. These will include:
- private and voluntary sector providers accepting that higher standards of disclosure and transparency apply in the public sector than in the rest of the economy
- performance data on services provided thorough partnerships always being made publicly available
- the mandatory framework for disclosing information currently existing in the NHS being extended to all PFI/PPP projects
- the Auditor General for Scotland being given statutory powers to access information on private providers relating to public contracts above a certain size
- all PFI/PPP contracts clearly setting out the grievance procedures through which individual citizens have redress
and - all PFI/PPP contracts to contain mandatory social and environmental reporting requirements.