PF2 – Private Finance without the bad bits, or re-badged business as usual?

So one of the announcements this week around the Chancellor’s UK Autumn statement was the launch of the new version of the Private Finance initiative – PF2 to its friends.

This aims to avoid some of the issues with the original PFI concept, which has led to some well publicised problems, particularly in the health sector, with Trusts paying unaffordable amounts of money for their shiny new PFI hospitals (for an example, see this recent NAO report which we may get round to commenting on in more detail).

There has been a 12 month review of PFI, but it’s failed to come up with any radical alternative, so PF2 is described by the Financial Times as similar to the previous scheme, with “only a few minor changes”. And there are fears that the new version could provide more expensive because the government wants a greater equity component within the funding model.

The government also claimed that it has saved £2.5B through re-negotiating PFI deals, but until we get the chance to poke around in the detail of that, we’ll reserve judgement on its accuracy. It’s also not particularly impressive in the context of the £200 billion plus long term liabilities within PFI schemes, and is some way short of the initial rhetoric we heard about how the coalition would negotiate huge savings. However, it is not surprising given the lack of any real negotiating leverage the buy-side has in such situations. So even the savings that have been made will, I suspect, be around changes and cuts to services within the deals, rather than any margin reduction from the providers.

But back to PF2 – how does it differ from the first time around? Well, companies will have to publish details of the profits from each project and statement of future liabilities. The deals will be “more flexible” to stop schools or hospitals being stuck with onerous maintenance contracts (not sure of the “how”, and the devil is in the detail here without a doubt).

The two most significant structural points seem to be that firstly, the government wants the public sector to take a bigger stake in individual projects and appoint a director to the Board of each project. Then contracts “will no longer include what is known as soft facilities management, or contracts for catering, cleaning, security and IT”. That’s a sensible move – it will simplify the procurement, and the task of suppliers having to build consortia, and avoid costs being loaded onto such services in order to disguise the basic occupation charges, which we saw happening in previous exercises.

There’s also an 18-month deadline for the procurement process, at which point any public sector money allocated to the project would be re-allocated. That’s simply a bad idea – you can immediately see the unintentional consequence of this, which will be bad deals signed in haste because we’re 17 months into the project. Suppliers will know that they just need to hold out in those final negotiations and the buyer will concede as the time limit draw near!

The other point of note for us is that central procurement units are being recommended for each Department who will engage in PF2 projects, with the first to be set up in Education. There's even a suggestion that maybe procurement could be centralised across government. Let's not get too excited though - remember Building Schools for the Future? That was a central unit that didn't gain a completely sparkling reputation.

I'm also not sure where Education are going to get the resources for this unit, as they've been scaling down their own internal procurement function dramatically over the last couple of years, including losing their SCS2 level CPO (Ian Taylor) and one of their two SCS1s (Melinda Johnson). Consulting / contractor opportunities perhaps?

So, overall, a mixture of some good ideas and some less good. I’m not sure I agree with the FT really – they seem to be fairly substantial changes to me, although the cynics will say that this is still off-balance sheet financing courtesy of the private sector, at a time when the State can borrow more cheaply than ever.  But I’m not sure there was a feasible and totally different model, so at least some of the failings of the old PFI are being addressed here.  Two cheers for the Chancellor!


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