Category: News

Department of Health committed to reviewing PFI deals

14/10/2015

Ben Gummer, Parliamentary Under-Secretary of State for Health, stated in Parliament on 12th October:

A considerable number of PFI contracts were poorly negotiated under the previous Labour Administration. They need to be looked at one by one, and the Department is committed to doing that again to see whether we can reduce the burden on trusts. My right hon. Friend the Secretary of State will have more to say about that in the course of the transformational changes that we are helping the NHS to make.

This is clearly to be welcomed.

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P2G helps Dyfed & Powys Police & Crime Commissioner terminate PFI

8/7/2015

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Back in February 2013, the BBC ran a story about a PFI for a relatively small police station that was costing Dyfed & Powys Police 18% of their entire estates budget. The build cost was £2.7m, yet by the end of the contract the total cost would amount to more than £20m.

The article quoted the Police and Crime Commissioner:

I know I've inherited it and I know it's very expensive and it takes up a lot of my estates budget. I know that what we've ended up with somehow is a state-of-the-art police station in the wrong place for the wrong price. It's deeply disappointing and particularly frustrating when obviously the police service is facing tough financial times as many public services are, we have this contract that we appear to be tied into that does cost us a lot of money.

It went on to say that, whilst attempts had been made to renegotiate the deal, these had been unsuccessful, and that whilst the project did not provide the public with value for money; there was no basis upon which they could vary the terms of the contract in the absence of the agreement of the contractors.

The Commissioner was reported as saying, however, that he would make sure that “no stone is unturned” to see if the issue could be addressed in future.

Intrigued by the story, and taking the Commissioner at his word, P2G wrote to him offering our services. We explained that we operated on a contingent basis and that there would be no payment without results. P2G is a Social Enterprise. We are not driven to maximise our revenue but, specifically, to deliver savings to the public sector.

Over a period of some months, we convinced the Commissioner that savings could be generated and we were eventually successful in winning a tender.

P2G led the review and were aided by Fenwick Elliott (legal), WSP (technical), and Clubfinance (financial modelling).

On 18th June 2015, some 28 months after the initial news report, the PFI was terminated by agreement. Total net savings to the Police Authority will amount to £7.7 million, with a net present value of £3.1 million.

We thank the Commissioner for his support and hope that other public sector authorities take note that significant savings can be made from the effective management of PFI contracts.

Press:
BBC News
Police & Crime Commissioner press release

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The Chancellor's Mansion House speech 2015: Fiscal responsibility - PFI, the Deficit, & Borrowing

10/6/2015

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PFI
Critics of PFI have long argued that it is both expensive and inflexible as a contracting arrangement, a fact that the Secretary of State for Health, Jeremy Hunt, recently seemed to recognise when he stated in Parliament that “many of the hospitals now facing huge deficits are seeing their situation made infinitely worse by PFI debt.”

In relation to value for money the Public Accounts Committee have stated that:

the Department of Health should support evaluation of alternative financing or operating options for costly private finance initiative schemes where there is a clear opportunity for improving value for money. [1]

So, with an estimated 20% of all PFI projects having a contractual right to voluntarily terminate the arrangement and replace an average cost of capital of 9% with government borrowing of 3.5%, why aren’t more public sector bodies doing it?

The short answer is, of course, availability of capital. To terminate a PFI contract the public sector needs to have available funds to pay the compensation involved.

Compensation for voluntary termination on PFI projects broadly falls into two categories: those that have a predetermined compensation sum, and those that calculate the compensation based upon the future profits of the private sector as determined by the market. On many of the contracts that have voluntary termination rights, particularly those with a predetermined termination sum, the value for money argument to terminate is compelling.

The Deficit
The deficit is defined as the gap between what we spend and what we raise in taxes [2]. In other words the current budget deficit, or surplus, is the difference between what the government spends and what it receives.

With the government pledging to return the current budget to a surplus in the current Parliament, anything that reduces the amount we spend on PFI projects would clearly count towards lowering the deficit.

If terminating a PFI contract both delivers value for money and aids deficit reduction, both of which form cornerstones of this government’s manifesto, then why isn’t HM Treasury falling over itself to raise the capital to fund this compensation?

Borrowing
The thing is, when most politicians and commentators talk about the deficit, they are not actually talking about the budget deficit; most are actually referring to government borrowing [3]. Borrowing and deficit are not the same thing. The two are linked, of course, as one covers the other, but the government doesn't just borrow money to fund the deficit. It also borrows to invest.

The current budget covers everyday expenses - welfare payments, departmental costs, etc. But the government also makes investments, such as on infrastructure projects, that are not included. If the government is running a deficit, it may make investments on top of this, and will therefore need to borrow to cover both.

But if the government has borrowed the money for these infrastructure assets anyway, why would paying off one set of bankers and investors who loan them the money at 9%, and replacing it with government money at 3.5%, increase government borrowing?

This is because, for many PFI projects, the Treasury maintain that the contracts are ‘off balance sheet’ for central government and government departments, even though most are recognised as ‘on balance sheet’ for all of the public sector bodies that use International Financial Reporting Standards (IFRS) to produce their accounts.

Treasury data suggests that liabilities that are recorded as ‘on balance sheet’ in the Whole Government Accounts (WGA) (using IFRS) may relate to around 97 per cent of all PFI assets, by capital value. The total capital liabilities in the WGA arising from Private Finance Initiative contracts were £37 billion in 2014. Only £5 billion of these were on the public sector balance sheet in the National Accounts [4].

So if all investment undertaken through PFI had been undertaken through conventional debt finance, Public Sector Debt would be around 2.0 per cent of GDP higher than currently measured.

What needs to happen?
At the moment there is a clear case for voluntary termination of certain PFI contracts to reduce the budget deficit and lead to a demonstrable increase in value for money for the public sector. Yet the ability of the public sector to utilise their contractual right to terminate is being constrained by a desire to maintain the PFI debt ‘off balance sheet’, even when it is already on balance sheet for the vast majority of the public sector bodies that are running at a deficit, i.e. NHS Trusts and Local Authorities.

Within the parliamentary paper on “Accounting and Budgetary Incentives” [5] it was recognised that past behaviours had been influenced by the desire to retain PFI projects off balance sheet. However, conclusions drawn within that paper demonstrate that:

The decision as to whether to proceed with a PFI deal should be based on rigorous qualitative and quantitative value for money evaluation of all the procurement options available. Balance sheet treatment should not be a part of this evaluation.

Clearly this test should not only apply at the procurement stage of a PFI project, but throughout its life. In other words, the decision by the public sector on whether or not to exercise their rights to terminate a PFI contract should also be taken on the basis of value for money. Balance sheet treatment should not form part of this evaluation.

In his Mansion House speech tonight, the Chancellor said:

We have a budget deficit that remains, at just shy of 5% of national income, one of the highest in the developed world.

Our national debt stands at over 80% of GDP. [6]

The funding of PFI termination payments would decrease one and increase the other. But let us not forget that the former is real, while the other is an accounting technicality. PFI debt is a real liability and has to be repaid, whether we like it or not.

The danger is that, in seeking to minimise a notional debt figure, there may be even more reticence to allow the termination of expensive and poor value for money PFI contracts. Such reticence hinders the Chancellor’s stated aim of reducing the deficit with the added longer term consequences for real national debt. Common sense needs to prevail.

Where value for money can be demonstrated, central government capital should be deployed to allow voluntary termination to occur. Balance sheet treatment worries should be consigned to the rubbish heap of political and economic red herrings, where they belong.

[1] House of Commons Committee of Public Accounts Financial sustainability of NHS bodies Thirty–fifth Report of Session 2014–15
[2] "2010 to 2015 government policy: deficit reduction” HM Treasury
[3] "UK debt and deficit: All you need to know" BBC News
[4] Office for Budget Responsibility Fiscal sustainability report 2014
[5] "Accounting and budgetary incentives: Treatment of PFI debt in the national accounts" Treasury Select Committee
[6] Mansion House 2015: Speech by the Chancellor of the Exchequer

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What is the value of off-balance sheet public-private partnerships (PFI)?

15/3/2015

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On 5th March 2015, in answer to the following question from Nicholas Soames MP:

To ask Mr Chancellor of the Exchequer, what the value is of off-balance sheet public-private partnerships.

The Chief Secretary to the Treasury, Danny Alexander, provided a written response:

A spreadsheet containing data on all operational PFI projects can be found on the following link. Balance sheet treatments for each project are recorded in columns O, P and Q and the capital value is recorded in column R.

Taking capital value only, and using the spreadsheet cited by the Minister, it is possible to provide monetary answers based on the relevant accounting standards. These are as follows:

The total capital value of all projects is £56.6 billion and data was not provided for projects with a capital value of £12.8 billion. Under UKGAAP, therefore, it is possible that the actual value of off-balance sheet PFI contracts is nearer £45 billion.

The above is calculated (in accordance with the parliamentary answer) on the basis of capital value. Of course, the amount repaid over the terms of these deals includes a basket of services as well as the repayment of capital value and interest.

Total payments for all signed PFI deals amount to £310 billion. In the year 2017-18, alone, the estimated total payments to PFI companies will be £10.6 billion.

Data source: Private Finance Initiative Projects: 2014 summary data (HM Treasury)

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Public Accounts Committee - scope to make savings on PFI

3/2/2015

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The Public Accounts Committee today published its report on the financial sustainability of the NHS. The report's recommendations included the following regarding PFI:

There is scope to make savings in the amount paid under private finance initiative schemes, which cost the NHS some £1.8 billion a year, as there are some examples where refinancing or buying out existing schemes could provide better value for money in the long run. There are also opportunities to release funds tied up in surplus capital assets that could be used for upfront investment in new models of care. For example, there are some £1.5 billion worth of unused land and premises in London alone.

Further, the Department of Health should:

support evaluation of alternative financing or operating options for costly private finance initiative schemes where there is a clear opportunity for improving value for money

With 26% of all NHS Trusts in deficit, including 80% of Foundation Trusts, this is clearly a pressing matter. Financial pressure is set to increase. As the report concludes:

It is clear that the old ways will no longer work – radical change is required to make the NHS financially sustainable.

The report notes that four of the six trusts with deficits greater than £25million had a PFI scheme, whilst Northumbria, who bought out their PFI scheme with assistance from a Local Authority loan, expect a £21.5m surplus this year.

The DoH reported that whilst buying out PFI contracts was not always appropriate, they were exploring other options such as renegotiating soft services, which make up a large proportion of PFI schemes.

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Sell-off

13/1/2015

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Peter Bach's independent film, Sell-off, highlights the pressures the NHS is under. Naturally PFI is heavily featured. You can watch the whole thing, below, or visit the Sell-off website.

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PFI, the baby, and the bathwater. Why it’s important to take stock of where we are.

10/6/2014

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Hexham Hospital is about to go through a voluntary termination. Reportedly, this involves Northumbria NHS Trust paying compensation to the private sector Special Purpose Company (SPC) of £114m. As a result, the Trust will regain ownership and management of the facility in all aspects and save £3.5m per year (£67m over the original life of the PFI contract).

What does this mean?

It means that, for this particular deal, the Trust was able to borrow sufficient funds (in this case from the Local Authority). It means that the cost to the Trust in re-procuring the services to run the hospital for the remaining years of the PFI, together with paying off the private sector for their contractual loss of profit, was £67m less than the cost of continuing to pay the PFI unitary charge.

To put all this in context, according to HM Treasury, the capital cost of the hospital was originally £54.1m.

The Trust Chief Executive called the hospital a “fantastic facility” that could never have been built without PFI. Nevertheless, the PFI was not seen as offering value for money in the current climate. Northumbria NHS Trust are to be congratulated for assessing their options and to have negotiated their way into a significant saving. It has taken them two years to do so.

Is this a model that other NHS Trusts and Local Authorities can follow? Unfortunately not all PFI contracts allow for voluntary termination. In addition, the compensation provisions vary, making termination more or less attractive.

And, crucially, not all PFI contracts are a bad deal for the public sector.

It is true that many PFI contracts have proved expensive, particularly the earlier deals. However, over time, the Treasury refined the standard form of PFI contracts. Mistakes were rectified, the imbalance between amount paid and the risks transferred was addressed.

The later PFI deals were a vast improvement on the earlier incarnations. If we look at later deals, in particular those done in Scotland, PFI was cut down to design, build and maintain. The provision of soft services (cleaning, equipment, catering, portering etc.) was generally outside the PFI. In our desire to rectify the wrongs of early deals we should not be blind to the fact that later deals provided a competitive procurement avenue. We should not throw out the baby with the bathwater.

What should a Trust (or Local Authority) do?

An Authority should be aware of the the difference between the costs of the PFI to the contract term, and the costs of running the facility under self-procurement. An Authority should also assess whether the contract can be terminated, and the amount of compensation payable. If the procurement saving is greater than the compensation payable, then the Authority should seriously consider its options.

Importantly, however, PFI contracts contain variation provisions. This means that the Authority has rights to change the contract. In many cases, significant savings can be made in this way. In assessing value for money, therefore, Authorities need to conduct a full review of their PFI contracts.

PFI contracts are complex and, to date, much of the experience and expertise has sat on the other side of the table. It’s different now. We would urge Authorities to seek expert advice and develop a plan for their PFIs. If value is already being achieved, that’s great. If not, then there is work to be done.

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P2G make first charitable donation to Sparks

26/10/2013

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P2G is a Social Enterprise Partnership that has committed to pay 10% of its profits to good causes. Our first accounting year ended 31st March 2013. This represented just four months of real operations. For our first donation, of £2,963, we have chosen Sparks.

Sparks is a leading children’s medical research charity dedicated to funding pioneering research into a wide range of conditions affecting babies, children and mums-to-be. Its aim is to help all babies be born healthy by supporting research that will have a practical and positive impact on children’s lives. Its medical breakthroughs make a difference to the lives of thousands of children across the UK.

Please take a look at their website for more details of the work that they do, and how you can help.

Thanks to pioneering research funded by Sparks, Oscar's body temperature was quickly reduced to 33 degrees Celsius following trauma at birth. Today he is a happy toddler.

Department of Health committed to reviewing PFI deals

P2G helps Dyfed & Powys Police & Crime Commissioner terminate PFI

The Chancellor's Mansion House speech 2015: Fiscal responsibility - PFI, the Deficit, & Borrowing

What is the value of off-balance sheet public-private partnerships (PFI)?

Public Accounts Committee - scope to make savings on PFI

Sell-off

PFI, the baby, and the bathwater. Why it’s important to take stock of where we are.

P2G make first charitable donation to Sparks

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