Treasury struggles to win PFI rebates

By Nicholas Timmins, Public Policy Editor

Published: February 16 2011 13:45 | Last updated: February 16 2011 19:41

The Queen’s Hospital in Romford, east London

The Treasury is struggling to get investors in private finance initiative projects to give it a rebate on the £8bn a year the public sector spends on such deals in order to help with the government’s swingeing public spending cuts.

Lord Sassoon, commercial secretary to the Treasury, announced a pilot project on Tuesday to explore the details of an £835m PFI hospital contract in Essex. The hope is to identify savings that can be applied across the 650-plus PFI projects that are operational. Such deals – which include schools, waste, road and defence projects – could not be immune from the savings the government was seeking elsewhere in the public sector, he said.

After six months of, so far, inconclusive talks, the Treasury said it “continues to seek a voluntary code of conduct with industry – investors, contractors and lenders – to ensure their positive engagement in reducing the costs of contracts”.

Under the pilot, the deal at the £835m Queen’s Hospital in Romford will be taken apart to examine both its operation and financial structure. The exercise will attempt to identify unnecessary levels of service, how the insurance and any efficiency gains are shared, how the asset is managed, and how savings can be made without large-scale – and expensive – contract revision.

Fixed NHS costs squeeze budgets

Queen’s Hospital is a 939-bed facility in Romford, east London, that opened in 2006, cost £261m to build and has won a design award.

But over 33 years, the private finance initiative contract will cost the NHS trust, along with maintenance and other services, more than £835m to Catalyst Lend Lease.

Those interest charges make up 4.6 per cent of the hospital’s operating costs – slightly above the NHS average, but way below the amount of fixed cost that other hospitals face under PFI.

For Walsgrave in Coventry, the Queen Elizabeth, in Woolwich, south-east London, and Dartford and Gravesham, in Kent, it is 16 per cent. For Bromley hospital it is 20 per cent.

Such high fixed costs mean efficiency savings have to come out of the remainder of the budget.

According to the Treasury, the pilot, to be completed by spring, will try to identify unnecessary levels of service, how the insurance and any efficiency gains are shared, how the asset is managed, and how savings can be made without big – and expensive – contract revision.

It has been chosen, the Treasury said, because “it is likely to be representative of the broad population of [accommodation-type] PFI contracts”.

Lord Sassoon said: “The launch of this pilot, along with the next round of engagement with industry on a PFI code of conduct, indicates our determination to drive out costs while ensuring front line services are maintained.

“It is critical that government urgently addresses every opportunity for savings across all contracts, no matter how complex they may be.

“We owe it to the taxpayer to eliminate wasteful practice and gold plating in contracts.”

Under PFI, contractors not only finance and build projects but hold contracts to run them across their lifetime – typically 30 years – partly with the aim of ensuring that maintenance is not skipped when finances are tight, something that has happened in the past.

But there are regular complaints that the contracts are inflexible, with hospitals and schools facing big bills for any variation, and in some cases being charged hundreds of pounds to move a plug or put up a shelf.

According to industry insiders, the contractors on projects are willing to give some ground, recognising that they will gain future business from government.

Those that finance the deals, however, are much less willing to do so. They argue that a contract is a contract and handing cash back will make financing future deals harder if past promises about guaranteed returns for performance are broken.

In addition, many of those that finance PFI projects are now more interested in burgeoning overseas markets for public-private partnerships at a time when there will be many fewer in the UK thanks to the spending cuts.

Nick Bliss, a PFI specialist at Freshfields Bruckhaus Deringer, the lawyers, said the investors’ attitude was that the money was often committed years ago, the dividend streams were in effect owned by pension funds and other institutions, “so why open Pandora’s box?”.

With multiple stakeholders in any given project – banks, pension and other funds, equity holders and constructors – “this is not like the government getting a corporate in to say ‘give me something back on your margins’.

“It is not just a two-way conversation. It is . . . multifaceted”.

Elizabeth Fells, the head of public services at the CBI employers’ organisation, said the government was right to look for savings.

“But it needs to maintain private sector confidence in the market, otherwise it could jeopardise future investment in infrastructure projects,” she said.