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The good news for PFI

AGENDA

Two rare things happened last week. The dour deductor cracked a joke during the delivery of his 10th Budget to Parliament and the Treasury published a report that shows it has listened to industry pleas for a positive shake-up of PFI. Andrew Hankinson examines the proposals

THANKS for the good news, Chancellor. The Private Finance Initiative is alive and well and the changes that the industry has been hammering down the Whitehall doors for are being delivered.

Last Wednesday, on the day that Gordon Brown led Parliament through his Budget, the Treasury also released its first report on PFI since 2003. PFI: Strengthening Long-term Partnerships is mainly focused on how to improve the performance of contracts during the operational phase. Handy for the 500 PFI projects that have got there, not for the ones that have not.

There is a lot of detail on how to stop local authorities being let down by contractors, such as Jarvis, in financial difficulties. And the Government has tossed in the question of whether it is worth including soft services in PFI, although it will not make a decision until further examination.

But what of the 200 projects, worth around £26 billion, which are in the deal pipeline and will be procured over the next five years? According to Richard Abadie, the Treasury's head of PFI policy, that figure is actually a conservative estimate.

The good news is that the Government has taken steps to make sure that contractors are not put off by long procurement times and high bid costs following years of strife with high losses for losers and long waits for bidders.

In a 2003 report the Treasury found that procurement was taking anything between 13 months and five years. Since then, Treasury mandarins have introduced standard contracts and tried to improve the management of procurement, but there is no data yet on the impact. It also introduced partnership vehicles such as Lift and Building Schools for the Future.

But the report admits: 'Evidence on PFI projects suggests that procurement times are still long, taking on average over two years from advertising in the Official Journal of the European Union to financial close, ' and adds, 'many projects slip from their published timetables.' A survey by the Major Contractors Group last year found that average procurement time was 27 months, compared with 29 months in 2003. According to the latest Treasury report initial evidence reveals 'more projects are closing in 18-24 months', which is not exactly a great step. But it does show that the partnership models are closing quicker, with the average Lift project taking 21 months to procure, three months quicker than what the Treasury found was the average.

The report continues: 'Although some of this time is taken performing tasks that are highly beneficial to the overall project, in terms of shortening construction times and improving value the Government recognises that there are some aspects of the process that could be refined, to the benefit of both public and private sectors.' According to the report, the reason that PFI procurement can often seem to contractors like swimming in treacle is the 'due diligence' taken to make sure PFI delivers value for money.

The report makes clear that, aside from due diligence, the main reason for slow procurement is a lack of expertise on the clients' side and that high bid costs are mainly put down to the level of design required by the client for the bidder.

The report says: 'The Government needs to ensure that the public sector has people with the appropriate skills and experience to develop and manage all procurement projects including PFI projects.' It suggests that once a public servant has gained experience on seeing through one scheme, they should be seconded to another project. It also suggests that sufficient staff are employed in the Government's private finance units and staff are given formal training.

Another big change, starting on April 1, is the grandsounding PFI Operational Taskforce, which will offer legal, financial and operational expertise to those private finance units that lack the capability to run such large projects.

As for the problem of high bid costs, the report says: 'The Government is aware that one of the major drivers of private sector bid costs is the design process.' The report adds that projects should be better prepared before they are put to the market, so that authorities have a high degree of certainty about the scope of the scheme, such as service requirements, affordability and acceptability of risk transfer to the private sector before the whole lengthy procurement process is started.

Treasury PFI guru Mr Abadie said: 'There will be some discussion with the market about that. The current design policy dates from 1997 and I don't want authorities to be looking at that document and thinking that's the way PFI should work. I think in the next three months we will have new policy guidance.' There will also be greater scrutiny of the Outline Business Case before going to the market and to ensure that contractors are not wasting their time with designs that the client later realises it cannot afford.

Also under the report's spotlight is the problem of schemes changing once a preferred bidder is appointed.

So to stop any crafty contractors putting uncompetitive prices on work for which there is no competition, the Government plans tighter restrictions on changes to the Outline Business Case.

One further problem that has sunk major projects, such as Whipps Cross hospital in London and Derriford hospital in Plymouth, is that they have been left with only one bidder.

The report clarifies the Government position, saying: 'Policy is that there should be a strong presumption that single bidder projects will not be value for money, except under exceptional circumstances.

'This remains the position and the Treasury will give greater clarity as what those exceptional circumstances will be and clarify the process for gaining approval for proceeding with a project when there is limited market interest in the project. Procuring authorities are required to consult the Treasury before proceeding with a project with a single bidder.' One surprise that arose out of the report is that the Government will continue with PFI in the housing sector ? despite accepting cost increases and delays in the housing programme.

The report puts the problems down to 'issues such as the complexities in obtaining planning permission for multiple sites and difficulties in estimating costs for the refurbishment of properties'.

John Prescott and his department of the Office of the Deputy Prime Minister comes in for some veiled criticism. The report says the Government is planning a shake-up of the ODPM, by introducing 'further financial and legal expertise' ? by implication an accusation that it has been lack ing.

The Government is also hoping to implement a partnership model for the housing PFI similar to the NHS LIFT or Building Schools for the Future programmes.

A Treasury spokesman said: 'We are discussing it with the ODPM and are looking to work the model up this year. I think we are probably looking to pilot it first and then it will be an ODPM decision whether to proceed.' So there are some plans in place and the good news is that the Treasury is listening. Now, as with all good Government initiatives, we just have to wait for it to be delivered.

Proposals to speed up PFI

Better-staffed departmental Private Finance Units

Secondment of public sector staff from project to project

Formal training for procurement teams at clients

More detailed Outline Business Case before going out to market

Increased monitoring to spot problems during procurement and changes to approvals

Product ion of a best practice PFI project governance model

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