Blog Posts

P2G helps Dyfed & Powys Police & Crime Commissioner terminate PFI

8/7/2015

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

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

10/6/2015

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

What can the next government do about PFIs?

30/4/2015

There has been a great deal of talk recently about the unaffordability of PFI projects and this is given added focus by the imminent General Election.

In October 2014, Daniel Poulter, Parliamentary Under Secretary of State for Health, confirmed in the House of Commons that the Government intended to support NHS Trusts in following the example of Hexham Hospital in reducing their PFI burden by supporting voluntary termination of their contracts where a value for money case could be made. However, this was swiftly followed by HM Treasury guidance on the early termination of PFI projects, that introduced a level of subjectivity over decision-making that makes it easy to block terminations.

It is clear that due to a mixture of concern to maintain off-balance-sheet treatment and the need to find budgetary resources to pay the compensation that arises on termination, real central support is not there for individual Trusts or other Authorities to follow Hexham's example.

So what choices will the new Government have when it comes to reducing the burden that PFI projects place on the public sector? Despite what protesters (such as The People Vs PFI) would like to happen, cancellation of PFI projects is just not an option. The public sector has entered into arms-length contracts for these projects, which the courts would have to uphold. Any incoming government could, and should, ensure that departments examine their PFIs for the potential to use the contracts themselves to effect better value for money. Initiatives to date in this regard have been piecemeal. However, what more could be done?

If an incoming government is not prepared to fund authorities that have the ability to terminate their PFI, then we would advocate the introduction of a new Treasury controlled social investment fund that allows the public to invest directly in PFI projects for a fixed level of return of, say 3%. This, in line with other government led investment schemes, such as the Enterprise Investment Scheme (EIS), should attract tax relief at the basic rate. This would make the return comparable with listed funds on the stock exchange investing in PFI assets.

The fund would be used to support the buyout of PFI projects where termination rights exist, either because voluntary termination rights are already within the contracts concerned, or because the public sector have a right to terminate the contract due to a default by the private sector.

In addition, it could also be used to refinance projects, replacing senior debt, where rates are typically more than double that of the government’s own borrowing.

In terms of refinancing PFI projects, at the present time were the cost of capital to be reduced to 3%, the private sector would be the beneficiary of between 50% and 90% of this gain. Given the taxation support and the aim of this policy, this would clearly be inequitable for the public sector. As such it is proposed that, through primary legislation, all PFI and PPP projects would be required to undergo mandatory refinancing where Treasury and the Authority concerned supported the refinancing. This is similar to rights which already exist on PFI projects signed since the introduction of SoPC4, the standard form of PFI contract introduced in 2007.

Treasury, whilst having a cost of 3% for the capital within the social investment fund, would loan the proceeds to the individual private sector PFI companies at the same level of return that the private sector debt providers currently charge. That way there would be no "refinancing gain" for the private sector to share in. Instead the arbitrage could be gifted back to the Authority concerned. This would halve the cost of debt, which typically forms over 60% of PFI payments.

The replacement of private sector debt would have the added advantage of reducing the cost of change for the public sector. At the present time lenders charge high levels of fees and advisor costs when the public sector wishes to amend or change the project or the levels of service it wishes to enjoy. This often prohibits cost reductions and value for money changes, reinforcing the perception that PFI as a procurement route provides long-term inflexible contracting arrangements.

We hope that whoever forms the next Government after May 7th will join us in making a real difference to the unnecessary burden of PFI contracts.

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

15/3/2015

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)

Public Accounts Committee - scope to make savings on PFI

3/2/2015

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.

What is still wrong with PF2?

15/1/2015

In 2012 the Treasury issued “A new approach to public private partnerships”, otherwise known as PF2. Whilst an improvement on the original PFI, we believe that PF2 has failed to address some important issues. Here we look at four problem areas that remain in PF2, which continually arise in our work with the Public Sector helping to manage their existing PFI contracts:

1 Use of Advisors
Whilst section 2.2 of the PF2 guidance points to the early appointment of advisors; there is no guidance on the scope of appointments for advisors for the Public Sector. Time and time again we see errors in the operational contracts that are primarily due to the lack of coordination between the legal, technical, financial and insurance advisors’ scope of service. The reality is that a commercial lead should be appointed to oversee the work carried out by these different disciplines to ensure that the awarded contract is fit for purpose.

2 The ability to change the contract
Whilst section 11.2.12 recognises the potential need to change the contract for issues other than Works or Services, unless the standard form explicitly enshrines this right, which it does not, it will remain the subject of continued disputes with the private sector.

3 Persistent Breach
The current guidance (23.2.3) is that minor breaches should be dealt with via performance points, with persistent breach termination rights only being enshrined in the contract if the performance points do not adequately incentivise the private sector to rectify minor breaches. Experience to date has shown that remedies using performance points are treated by the private sector on a purely business case basis. If the performance points are worth a deduction of £1 but the cost of rectification is £10, they will rarely bother to rectify the breaches. As such we believe that it should be mandatory for persistent breach termination rights to be enshrined in the PF2 contract.

4 Due diligence over subcontracts
Section 27 does make a small number of recommendations over the level of due diligence that an Authority should carry out on the subcontracts. In reality this is where any Authority should ensure that a high level of due diligence is carried out. The Authority needs an in depth understanding of a whole range of issues: the way the subcontractors have priced delivery, levels of margins, loss of profit rights for early termination, responsibilities for latent defects, and risk allocation. The list of issues that can fundamentally affect an Authority over the lifetime of the contract is vast and PF2 guidance does not go nearly far enough.

Sell-off

13/1/2015

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.

P2G charitable donation for 2014

12/1/2015

Each year, P2G donate 10% of profits to charity. This is our second year of operations. In our first year we chose the children's medical research charity, Sparks. This year, despite Bruce having his own bike stolen and Russell managing to walk past ranks of Boris bikes every day without even being tempted, our charitable donations were cycling themed.

Cycling has obvious health and environmental benefits. A team of trust staff and private sector partners at University College Hospital London showed that it can also raise money for a good cause. P2G donated £2,000 in sponsoring their “Mallorca 300” cycling fundraiser, which raised a total of £50,000 for Great Ormond Street Hospital.

UCLH-Partners participating in the "Mallorca 300" for GOSH photo: oliver_neilson

Unfortunately, cycling also has its dangers. Every year in the UK 19,000 cyclists are involved in accidents, 3,000 of which result in death or serious injury. Despite these numbers, the data available is poor and policy decisions are often made on the basis of speculation rather than clear evidence. The Royal London Hospital has seen a 400% rise in the number of cyclists killed or injured in recent years.

Serious cycling casualties requiring full trauma team activities at RLH

In response, Barts Charity ran a unique, multi-disciplinary seminar chaired by Jon Snow, with the subsequent launch of its Safe Cycling Appeal. Their flagship project being to compile a database on cycling injuries to address the poor state of information currently available. This new data will be used to monitor and reduce such incidents in the future. Our £14,792 donation has helped the campaign to reach a significant project milestone but much more can be done. Please take a look at the campaign website and donate if you can.

The Royal London Hospital

We're looking for good causes for next year's donation. If you have any suggestions, please let us know by email.

An action plan for health PFIs?

23/10/2014

The subject of PFI came up in parliamentary questions on Tuesday with Jesse Norman asking what steps are being taking to encourage NHS Trusts to manage their PFI costs effectively. There were some interesting answers from Daniel Poulter, Health Minister:

“PFI schemes have had their contracts reviewed for potential cost savings. A major data collection on the results is currently under way.”
DoH would “do all we can to support hospitals to reduce the costs of PFI that have been inflicted upon them”
And “make sure that that specialist advice is available for the NHS”
Hexham “has seen that the way forward is to buy out the PFI and free up more money for front-line patient care. We will support as many more hospitals in doing that as can be achieved”

We look forward to seeing how this develops.

Why aren’t we seeing more PFI savings?

20/10/2014

We know that many PFIs are overly expensive, by which we mean that the financing and delivery of services, to the same facilities and to the same standards, could be achieved for a substantially lower cost over the existing contract term.

We also know that PFI contracts contain variation mechanisms via which the public sector is able to enact changes to the existing arrangements. In short PFI contracts can be changed.

PFIs are expensive + PFIs can be changed = ?

The case for the public sector to pursue savings seems so obvious yet we hear of so few examples. On the latest available data, 566 PFIs have yet to report savings *. Why is this the case? We suggest that there are 5 main reasons.

1 Priorities
Many Authorities have not seen PFI as a priority. Where PFI costs are a small part of the budget, e.g. schools within Local Authorities, other areas have been turned to first when looking for savings.

2 Lack of knowledge
There has long been the perception that PFI contracts cannot be altered. This is a misunderstanding of the nature of the agreements. And there have been few publicised examples of restructuring to spur others on. Where they exist, Authorities are either reluctant to make deals public or are prevented from doing so by confidentiality clauses. Media efforts have, to date, been poorly directed.

3 Expense
Both the identification and delivery of savings requires resources. The variation and amendment of contracts requires lawyers and, often, other advisers. The Authority has to spend money to save money. Even committing to expenditure does not guarantee success and, therefore, the prudent nature of public sector spending can often mitigate against its own interests.

4 Lack of good advice
Where is an Authority to turn when wishing to make savings? Lawyers and accountancy practices are expensive and not traditionally good at operating commercially outside their traditional area of expertise. Management consultants do not have a track record in the area and tend to bolt on PFI to their traditional areas of expertise. Semi-public bodies, such as Local Partnerships, are expensive and have yet to deliver significant savings. It is for this reason that P2G was formed. We identify savings at no risk, and with no commitment, to the public sector.

5 Concern over ‘relationships’
The public sector have often, curiously, acted as the junior partner in PFI. The premise of PFIs, that the private sector provides the monitoring of performance, the facility and ancillary services, whilst the public sector concentrates on the teaching / nursing, means that the most significant involvement of the public sector is in paying the bills. This can lead an Authority to be reluctant to rock the boat, even where self-monitoring is clearly not happening.

There is also an element of fear. The private sector is seen as a well-funded beast with big-name advisors and lawyers on tap. Changes that may lead to reduced private sector returns are likely to be resisted and disputed. Such an action could be met with retaliation, e.g. against late payment by the Authority, or just making future operation more difficult.

The truth is that these are contracts and should be dealt with professionally by both sides.

What can be done?
We believe that each Authority should, as a minimum, understand what savings are possible on each of their PFI contracts, and the risks of pursuing these savings.

P2G is a Social Enterprise that has, so far, helped deliver £297 million in savings to the public sector. No other adviser has this track record. We offer a no risk, commitment-free, service in identifying PFI savings. We are here to help.

* Savings from operational PFI contracts (National Audit Office) November 2013