11. A key factor in the management of the funding
competition was the appointment of experienced advisers by the
Treasury and Exchequer Partnership.
As the cost of professional advice had amounted to about £2.6
million, we asked if it was necessary to rely so heavily on advisers.
The Treasury said that as it was a complicated process they had
equipped themselves with a good advisory team. However, the existence
at that time of the Treasury Taskforce meant that the Treasury
had not been over-dependent on external advisers. Asked whether
there was a case for other departments to build up more internal
expertise, thereby reducing the reliance on costly external advisers,
the Treasury said that this was the reason for the formation of
Partnerships UK. As a repository of PFI expertise available for
use throughout the public sector, the existence of such a central
body would avoid the risk of the public sector re-inventing the
wheel every time a PFI project was undertaken.
12. We asked the Treasury if such a large investment
in professional advice would have been made if the project had
been a conventional, public sector procurement. They thought that
too little would probably have been spent on advice if the project
had been procured conventionally, although they did not have a
specific figure in mind. Work by the Office of Government Commerce
had demonstrated that many public sector projects tended to go
wrong from an early stage. The message to departments was that
they should invest in getting projects right from the start, whether
they were procured conventionally or through the PFI.
13. Poor public sector project delivery may suggest
that project management skills have in the past been undervalued
within Whitehall, so we asked whether a successful project manager
had ever become a permanent secretary. We were told that permanent
secretaries needed particular skills that reflected their heavy
involvement in policy advice, working very closely with Ministers.
The emphasis in the past had been on the policy aspects of the
job rather than delivery, and project management skills may not
have been as highly rated as other skills. However, there was
now a shift in emphasis to successful delivery, which would give
project management skills much greater significance and importance
in the future.
14. The cost of private finance for the project was
just over one and a half percentage points above the rate at which
the Government could borrow through the gilts market.
The cost of finance therefore appeared much higher than that at
which the public sector could have funded the project, so we asked
whether it would have been better value to finance the project
with gilts. The Treasury told us that the premium over gilts reflected
the inherent risks in the project. If funds had been provided
at the gilt rate, this would have meant lending to a risky project,
while making no charge for the risk.
It would not have been sensible to lend money to a specific PFI
project at a privileged rate. If public funds were lent at a properly
risk-adjusted interest rate, the cost of finance would be the
same for both the public and private sectors. If public funds
were lent at a rate below the risk-adjusted rate, then the public
sector would be taking an unpriced risk.
15. The Treasury said that the key risks in this
project included such items as cost overruns and construction
delays, all of which had been transferred to the private sector.
Although such risks could be transferred without the need to get
the private sector to finance the initial capital costs, experience
did not support the argument that risk transfer was successful
where the finance was supplied by the public sector. By leaving
contractors to back their own judgements on project risk, the
use of private finance made for better project management.
16. In assessing the value for money of PFI deals,
Treasury guidance requires that the cost of a deal should be compared
against a public sector comparator. The Treasury had estimated
that the £170 million cost of the project might be £20 million
less than a comparable public sector project, using a discount
rate of 6 per cent. Recognising that these cost estimates would
be subject to examination by the C&AG in due course, we asked
the Treasury whether the percentage discount rate was reasonable,
given that real interest rates were at a much lower level. We
were told that the discount rate was important in such calculations
and that the 6 per cent figure was being examined, although a
decision on whether or not to change the number had not been taken.
Real interest rates were indeed lower than 6 per cent, but the
discount rate was not wholly dependent on market interest rates
as it incorporated a number of adjustments to reflect items such
as inherent risk and the effects of taxation.
1 C&AG's Report Innovation in PFI Financing:
The Treasury Building Project (HC 328, Session 2001-02) Back
C&AG's Report, paras 4-8 Back
Qs 1-2, 75, 102, 160 Back
Qs 10, 180 Back
C&AG's Report, paras 1.12-1.14 Back
Qs 3-4, 26, 158 Back
Qs 161-167 Back
Qs 14-16 Back
C&AG's Report, para 1.42 Back
Qs 96-97, 149, 173 Back
Qs 60, 105-144, 168 Back
Qs 49-59 Back