Call for evidence response

Public private partnership schemes

1. Introduction

The Association for Public Service Excellence (APSE) is a not for profit local government association representing over 250 local authorities across the U.K. APSE consults, develops, promotes, advises and shares on best practice in the delivery and provision of public services. This response has been compiled following dialogue with member authorities. 20 of the 22 councils in Wales are members of APSE.

2. The potential benefits, costs and risks that may be involved

Benefits

The main benefit of PFI perceived by local authorities is where credits are received. However, in Wales, there have been two bidding rounds (in 1997 and 1999) for PFI credits and there are no plans to introduce further bidding rounds. Out of the 621 current signed deals on the HM Treasury website, there are only 24 signed from the Welsh Assembly Government. Of these 24, only 10 have a financial close date of 2001 and beyond, which may be due to the lack of PFI credits beyond 2000.

The move to international accounting standards from 2008 will leave most PFI assets on the public sector balance sheet. This may result in PFI credits becoming less available.

Another benefit claimed in relation to PFI schemes is that the financial risks are absorbed by the contractor and that there is a transfer of risk. However, a lot of evidence exists to show that this is not the case.

Costs

The cost of private sector borrowing is relatively high compared to that of public sector borrowing. For example, in 2002, Audit Scotland calculated these costs as adding £0.2 to £0.3m each year for every £10 million invested. The public sector comparatively can access low interest rates because the lending is secure.

There are added costs in setting up PFIs, such as expenditure on engaging consultants, lawyers and designers and the costs of variations to the contract. By engaging consultants, once the PFI contract has been set up, there is a danger that when they leave, the contract isn’t fully understood by the local authority and there is the potential for mistakes. PFIs are highly complex agreements, which won’t be understood by a single individual.

Risks

There are a number of risks associated with the timescales involved and the complexity of public private partnership schemes including PFI. PFI contracts are typically 25 years and during such a long period there is no certainty that the economic conditions that suited PFI provision will continue in the intervening period. In addition, local authorities will not be able to predict the external environment and their needs in 25 years time. Being tied into long-term rigid contracts can be a risk if there are large technological changes that make specifications obsolete or if there are higher environmental standards on buildings, for example which may result in the local authority needing to vary the contract and paying premiums to do this.

The output specification in a PFI contract is also set for the life of the contract, and no changes can be made without the agreement of the contractor, which usually entails extra funding. This means that new technical standards, advances in technology or political changes cannot be accommodated flexibly. Another consideration is that when the contract comes to an end, there may be a need for another major repairs/replacement programme.

There could be a substantial reputational risk to an authority if its PFI provider becomes insolvent during the contract period, potentially leaving the authority with no contractor and deteriorating stock. In addition, the contractor may go back to the local authority for renegotiations if they find the agreement unviable and due to reputational risk, the local authority being forced to change the terms of the agreement.

3. Any policy changes (whether to remove barriers or apply controls) that may be needed to realise the optimum outcome

APSE would welcome clarification from the Welsh Assembly Government that direct services should be involved in the whole process where private finance is being accessed.

Another key policy change would be the evaluation of public private partnerships, including research into the costs, benefits, risks and lessons learnt from past schemes and an evaluation of public sector alternatives. APSE would also favour an approach where credits were not limited to PFI schemes but financial support was available for other approaches as well.

A key issue with the current approach to PFI is that private companies can enter an agreement with a local authority and then refinance the loan at a lower rate of interest. It is important that when private organisations can access better rates of interest for the PFI, then the local authority also benefits from this and there is a profit share.

4. Practical guidance to enable the public sector to strike the most advantageous arrangements within the agreed policy framework

Practical guidance should include the need to do a full options appraisal before going to the market and to clear about the objectives from the beginning of any partnership. The Office of Government Commerce recommends Gateway Reviews and APSE supports this approach. However, there needs to be democratic scrutiny of the process.

Local authorities need to decide their own requirements prior to entering a partnership arrangement and decide the best way in which the public sector can use private sector finance for value for money and for local public value, such as the creation of local employment.

APSE have produced a research publication on achieving community benefit via procurement and have vast expertise on this, as well as on PFI, which we would like to share with the National Assembly for Wales.