Whitehall raises the finance stakes

29 November 2001
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29 November 2001

The Treasury saved millions on its headquarters with a novel funding scheme. But it is courting controversy. David Arminas explains

When the Treasury reoccupies the western end of its elegant headquarters in Westminster next summer, the staff, including the procurement professionals who set up the refurbishment deal, can congratulate themselves on a job well done.

A report from the National Audit Office has come down squarely in favour of the contract, a 35-year public finance initiative (PFI) arrangement. The NAO says the Treasury has demonstrated there is scope for innovation in PFI and Gordon Brown's department has been rewarded with significant improvement in the value for money of the deal.

It is rare that "innovation" is heard in the same breath as government department. The NAO report goes a long way to addressing this situation and purchasers are a big reason why. It has also raised the stakes for purchasers as they are now acknowledged as key players in the government's most controversial of plans to deliver public services.

In the Treasury PFI case, the report praised the "good planning, strong management and the use of skilled advisers" as integral to this success of the £170 million deal, originally set up in 1997.

Key to ensuring that the PFI gave value for money was the use of a separate competitive tender for a financing package after the project had been designed. The Treasury procurement team had a good understanding of funding risks and feared that backers would be unable to meet contractual obligations in an increasingly volatile marketplace.

The competition attracted no shortage of tenders, with 19 in all and a shortlist of six. The NAO believes that the Treasury and Exchequer Partnership have established a template for future public-private partnership (PPP) financial packages.

PFI and PPP projects are about sharing risks and, importantly, rewards. By hiving off the financing arrangements, the consortium and government are taking on a new partner. In essence, the supply chain has been lengthened and risks spread around.

The NAO is not being prescriptive about separate competitive funding tendering, which is good news for purchasers. But it does say that it should at least be considered by purchasers, ensuring all avenues for success have been explored.

Solid grounding

This means purchasers will increasingly need a solid grounding in the financing of PPPs if they wish to sit at the top table. Their involvement will likely begin at an earlier stage and last longer during a project's lifetime. Many contractors see PFI/PPP as the way to ensure government construction projects are on budget, built to quality and delivered on time. The NAO's report is a fillip in the propaganda war against PFI's detractors, who point to problems in mixing both sectors' interests.

Such critics claim that some of the buildings, especially hospitals and schools, are poorly built. Arguments rage over whether PFI hospitals are more costly than those built under standard contract arrangements.

Construction companies acknowledge that margins on PFI projects can be as much as 10 per cent as against 2-3 per cent for regular contracts. But critics caution against the private sector making too much money on the backs of taxpayers.

The government has often been on the back foot over major high-profile IT projects completed under PFI and that have failed to deliver services. The Treasury itself, in its role as the taxpayers' spending watchdog, has questioned IT projects, many of them PFI projects. The House of Commons public accounts committee criticised the PFI project for a bridge connecting the Isle of Skye to the mainland, and blamed the development department of the Scottish Office for not monitoring the financial package, resulting in cost overruns.

A central reason for the formation of the Office of Government Commerce (OGC) last April was to put an end to costly overruns on major projects, including PPPs. Purchasers will increasingly find themselves at the centre of this debate because their mantra has become client satisfaction. A soon-to-be-published CIPS policy on PFIs will set out professional guidelines to this end.

The OGC is working on its own guidelines. A consultation document is now circulating to government procurement departments asking for comments prior to publication.

Whether purchasers are personally for or against PFI/PPP deals, they will have to get to grips with them as the government is committed to a greater use of the scheme. Their performance will be a critical factor in the success, or otherwise, of such deals.

SMnov2001

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