Press Notice No. 4 of Session 2002-03, dated 30 January 2003
FOURTH REPORT: PRIVATE FINANCE INITIATIVE: REDEVELOPMENT OF MOD MAIN BUILDING (HC 298)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today that it is false and spurious to present cost comparisons between PFI and conventional procurement as having a high degree of accuracy.
Mr Leigh was speaking as the Committee published its 4th Report of this Session, which examines the extent of financial savings from this deal, the comparative costs of financing deals under the PFI and conventional procurement, and the risks associated with the long term PFI contract.
The Committee found that closer attention to financing costs would have been particularly helpful during the 16 months it took MOD to close the deal. Reducing the length of that period, postponing the choice of finance to the end to get the cheapest form available, and a cannier approach to the financing markets prior to closing the deal all might have helped to secure savings on this project. MOD's last minute negotiations formed the basis of the claim that this £746 million project is expected to yield savings of just £100,000. It would have been more productive for MOD to focus earlier on the pressures that increased the price of the deal by £99 million after Modus became preferred bidder, of which £60 million was attributable to financing costs.
Financing costs form a significant part of the cost of a long term project, and departments should ascertain how the costs of using private finance compare to other forms of procurement. The Department could not tell us what the extra costs of private finance were in this deal. The value for money case for PFI depends on it bringing benefits that outweigh the extra costs of private finance, and can only be ascertained if those extra costs can be estimated.
Departments need to think through their future needs to avoid the extra time, and possibly costs, of arranging additional contracts for services excluded from a major PFI contract. MOD had to enter into a separate contract for 500 additional staff when it found, shortly before completing the PFI deal, that these additional staff needed to be accommodated in central London. It also excluded from the PFI contract the provision of IT systems, as it was unable to identify the systems that its staff would require when the new accommodation becomes ready in 2004.
Where future requirements are genuinely uncertain, departments should assess which will be the more beneficial option for meeting them: paying for flexibility within a long term contract, or using other forms of shorter contractual arrangements. In accommodation projects, departments will need to assess the risks of being left with too much or too little accommodation. It may prove more expensive to seek additional accommodation in the market than to pay for this flexibility within a PFI contract.
Mr Leigh said today:
"Too much emphasis seems to have been placed on a minuscule cost difference between PFI and the conventional route. The difference was a mere 0.01% but as these costs are nothing more than estimates it is false and spurious to present them as having a high degree of accuracy. Value for money judgements must be based on broader considerations, particularly where there is little significant difference in the cost comparison."
This Report can be accessed via the internet from around 11.30 am on the day of publication.