Private Finance Initiative Contracts

Tuesday 19th July 2011 Written Statements

[The Economic Secretary to the Treasury (Justine Greening)]

This Government have previously voiced their concerns about the value for money in private finance initiative (PFI) contracts. Today, as part of ongoing plans to reform PFI, Government are announcing their plan to deliver £1.5 billion savings from the existing stock of PFI projects. These savings will be retained by the contracting authorities and put towards front-line public services.

The Government are committed to ensuring taxpayers get value for money from PFI contracts. And we have already taken a series of steps to improve the cost effectiveness and transparency of PFI contracts.

At the spending review 2010 the Government abolished PFI credits to create a level playing field for all forms of public procurement.

In January this year the Government issued draft guidance to support the public sector in making savings from operational PFI projects. Since then Cabinet Office and Treasury have tested the guidance on a pilot project at the Queen’s hospital in Romford, Essex and the Ministry of Defence (MOD) has conducted savings pilots on its PFI projects. And today, on the Treasury website, the Government publish the updated savings guidance that reflects the lessons learned from these pilots.

In April this year the Government introduced new guidance to Departments to strengthen the approvals process of all projects. All major projects outside of a Department’s delegated authority now need to go through three approval points.

And earlier this month the Government published for the first time an unaudited summary of the whole Government accounts (WGA), a new level of financial transparency which revealed the scale of PFI project liabilities. The Treasury is also engaging with the National Audit Office on a new study of the balance of risk and return of private investor equity in PFI projects, and to consider how financial transparency in this area could be improved.

In making this announcement today. Government recognise the role played by the strong parliamentary campaign to reduce PFI costs and secure better value for money for the taxpayer.

PFI saving pilots

Annual savings of around 5% have been confirmed for each of the Romford PFI savings pilot and two MOD pilots. Savings have been identified in three main areas: effective contract management, making better use of PFI assets, and ensuring the public sector only pays for what it needs.

The level of savings achievable at other PFI projects will vary, reflecting the bespoke, complex nature of assets and services delivered under these long-term contracts. But the pilots have shown that valuable efficiency savings can be achieved when private sector suppliers work together with the public sector to reduce PFI costs.

Applying the lessons of the pilot projects across the PFI portfolio

The Government want to apply the lessons from these pilots to PFI projects across the public sector.

The Cabinet Office, supported by Treasury and by local partnerships, will now lead a central programme that brings together ongoing major Government supplier renegotiations with project level savings initiatives being delivered by local contract management teams across the country, for services including defence, hospitals, schools, street lighting and waste. All operational savings that are made will remain with the institutions concerned, to be reinvested in the areas of highest priority, to support investment in our hospitals, schools and other front-line services.

This new savings programme will drive the sharing of best practice across public sector authorities, recognising that improving local delivery skills is essential to ensure better value from the use of private finance in public infrastructure in the future.

In addition, the Treasury will be taking forward engagement with the PFI industry to secure agreement to a code of conduct for industry and public sector co-operation on operational savings initiatives, and to improve transparency. The Government will continue to look at what more can be done to get better value for money from existing and future PFI projects.

It is important that the lessons demonstrated from these savings pilots are factored into future procurements from the very beginning. The first example for this will be the new programme of privately financed schools that was announced today. The new schools programme provides an opportunity to test an improved approach to working with the private sector to deliver essential public assets. This Government are committed to ensuring that the lessons learned from the PFI savings pilots are applied in the future pipeline of privately financed projects.