MP's publish report on PFI in Housing and Hospitals

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

“Local authorities and health trusts used PFI because there was no realistic alternative, not because it represented best value for money

 “The use of PFI and its alternatives should now be robustly evaluated. Looking back at PFI procurements, the government should also do more to find out where and why PFI works best and capture the lessons. Departments should also do more to ensure they get the best out of existing PFI contracts

“By bundling together large numbers of PFI projects, private sector investors may use the consequent economies of scale to drive up the value of their interests and generate bigger profits.  We are concerned that the benefits arising from these economies of scale are not being shared by the taxpayer.

“At a time when public finances are so tight, government must use the weight of its buying power to negotiate with major PFI investors and contractors a better deal for the taxpayer.”

Margaret Hodge was speaking as the Committee published its 14th Report of this Session which, on the basis of evidence from the Department of Health and the Department for Communities and Local Government (the Departments), examined their management of PFI programmes to deliver hospital support services and procure social housing.

The Department of Health and the Department for Communities and Local Government (the Departments) are responsible for sizeable portfolios of PFI projects covering hospitals and social housing. By April 2009 there were 76 operational PFI hospitals in England and over 13,000 homes had been built or refurbished through PFI, representing a small but significant part of investment in social housing. The letting of contracts and the responsibility for managing them is devolved to NHS Trusts and local authorities. The Departments are responsible for overseeing their PFI programmes and reporting to the public and Parliament on value for money. This includes establishing the funding arrangements, approving contracts and providing support to the local projects.

As with previous Reports, we found no clear and explicit justification and evaluation for the use of PFI in terms of its value for money.

We are particularly concerned at central government’s failure to use the market leverage that comes from overseeing multiple contracts to get better value for the taxpayer, and the lack of robust central data to support effective programme management.

Whilst PFI has delivered many new hospitals and homes which might otherwise not have been delivered, there is no clear evidence of whether PFI is any better or worse value for money than other procurement routes. There were instances where PFI may have been used where there was no evidence that it was the best procurement route. The Government should be doing more to identify the circumstances where PFI works best, capture the lessons learned from PFI procurements and apply clear criteria to future decisions over identifying the best route for particular public infrastructure investments. For instance, we expect any procurement decisions on the housing projects whose future is now being reconsidered in the context of the Comprehensive Spending Review to be made using clear value for money criteria.

It is clear that the implementation of PFI projects could be improved. Many PFI housing procurements have taken very much longer, and cost a great deal more, than originally planned. On hospitals, most are receiving the services expected at the point contracts were signed and are generally being well managed. There are, however, wide and unexplained variations in the cost of hospital support services, such as cleaning, catering and portering.

There are important developments in the PFI market which affect the profitability of these contracts and we are concerned that government is missing a trick in failing to secure the appropriate financial advantages for the taxpayer. Specialist financial institutions have been bundling projects together. This gives them the prospect of greatly enhancing the value of their interests in the projects through economies of scale. We are very concerned that the Department of Health has not approached the major investors and contractors to negotiate a share in these efficiency gains and economies of scale. Departments should exploit the commercial weight and buying power that comes from letting substantial contracts, but at present neither central government nor the local bodies benefit from this. At a time of public spending constraints there is an obligation on government to secure better deals for the taxpayer, as government has done before when successfully securing a share of PFI refinancing gains.

A lack of good quality central data undermines the Departments’ ability to monitor performance, to drive efficiency savings and effectiveness improvements, and to target support to local providers. For example, the Department of Health does not know whether services provided more cheaply in some locations are better value for money, or alternatively poor quality, or reflect inconsistencies in the way costs are recorded.

It seems that the central team in the Department of Health is already under-resourced and unable to secure proper value for money from these contracts.  It would be a false economy to have weak central teams that are unable to implement our recommendations, all of which are aimed at delivering better value for money in the long term. The issues facing housing and hospitals will also be relevant to other PFI programmes.