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.
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.
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