Having heard all the evidence presented, it is not clear to me that either the prosecution or defence has made out a sufficiently compelling case. Independent enquiry suggests that either side could have weighed in evidence the fact that PFI, just like any other business, has been affected by market forces which have shaped its evolution. Early-wave pre-standardisation contracts were negotiated on the basis of risk assumptions which were cautious to averse. Competition and experience coupled with the introduction of standard forms of contract have relentlessly driven down the premium attached to risk and the cost of capital.  The defence should have made more of the impact of inflation – over which neither procuring authority or project company has any control – which has accounted (and will continue to account) for much of the cost escalation presented by the prosecution.  Anyone can see that linking costs to RPI is in reality inevitable and given the intrinsic unpredictability of retail prices, anyone can see that predictions of the through-life cost of PFI projects are at best guesswork and may be seriously misleading. Claims made by prominent parliamentarians and trumpeted by the media tend to be based upon such guesswork. Another issue which has not been adequately illuminated by the defence is the extent to which private companies have sustained losses (in the case of the National Physical Laboratory project, terminal for John Laing Construction). Jarvis is widely known to have lost large amounts on a number of service contracts and other companies of high standing have found that conflicting interpretation of service specifications and ensuing dispute resolution has left them out of pocket. The reality is that some PFI investors have definitely not been laughing all the way to the bank.

Thus whereas both prosecution and defence have presented a black and white picture, from where I’m sitting there appear to be several shades of grey. I’m also conscious that HMG’s record on direct procurement over the years has contributed its fair share of shocks to the taxpayer in terms of time/cost overruns and cancellations. At least with PFI these risks sit squarely with the private investors.

So, after an inconclusive debate, what does the future hold for PFI/PPP and where should this method of procurement sit within the limited range of options available to HMG for continuing its much-needed programme of infrastructure development?

Subject to some general – oft repeated and seemingly ever forgotten – observations about the urgent need for greater professionalism and competence in the specification and management of capital projects by the public sector, the overriding principle for public procurement should be to ensure that the taxpayer receives best value and is put in a fair position to judge that this will be delivered before being presented with the bill as a fait accompli.

Talk of abandoning PFI is akin to advocating throwing the baby out with the bathwater. As a procurement method it has a number of things going for it – it is well understood by the capital markets, contract documentation is well developed, it reliably and predictably delivers projects where alternative methods (if available) have proved unreliable and unpredictable and the PFI industry contains a reservoir of competitively priced, widely sought-after expertise which needs to be harnessed for future growth rather than be relegated to the out-tray.

Is PFI perfect? Absolutely not! It’s imperfections start with the byzantine complexity of EU public procurement rules (enshrined in UK law) which absorb huge amounts of time and money on both sides of the public/private sector divide, most of which is a hostage to fortune and is thrown away if for whatever reason the procurement is cancelled. So-called ‘deal specific variants’ over-complicate standard form documents already too complex after years of professional tinkering. The obsession with inviting tenders against an ‘output specification’ – basically a loose concept of outcomes the procurer is expecting – demands an ‘apples and pears’ assessment of the merits of widely different approaches which is inefficient and can lead to a triumph of aesthetics over functionality. As the lawyers would say, “this is not an exhaustive list”, however, taken in the round the faults with PFI/PPP – most of which are relatively easily curable – add significantly to the overall cost of the projects which make it to the winning post.

Inevitably in this economic climate it is the headline £p numbers which excite attention. Anyone who is told that payment of £4 million over 25 years for something costing £1 million to build will be easily persuaded that the deal is a rip-off – particularly if excited by non-specific references to refinancing gains and big returns to investors. A mixture of truth and disingenuity can be very misleading. The whole story is rather different. Leaving aside inflation mentioned above, much of the £3 million difference in the example used will pay for maintenance and other services ensuring that at the end of the 25 years the public assets are in good condition capable of delivering the underlying business functionality to the public with no backlog investment needed. Contrast this situation with publicly maintained assets showing disastrous levels of deterioration resulting from accumulated under-provision and a bill for restitution that can never be afforded.

Some advocates have extolled the virtues of the Scottish ‘No-Profit Distribution’ model as a nirvana approach to the future ‘acceptable’ shape of PFI/PPP. The NPD system has lenders but not investors and whilst seeking contractually to extract ‘super-performance’ from PFI companies to create surpluses exponentially returnable to the procuring authority, it offers little incentive, or realistic opportunity, for returns to be realised. The market will of course be judge and jury on NPD, but arguably there are simpler and more effective ways to achieve gains for the taxpayer from properly incentivised evolutionary improvements in working practices, energy savings and service developments. There may also be merit in looking at the French ‘cession de creances’ (assignment of receivable), which aims to achieve an equable sharing of risk and debt in PPP contracts and may offer bankable variants to the existing UK models which could yield a demonstrably better deal to the taxpayer.

As the Lord Chancellor said of the ending of his nightmare in Gilbert & Sullivan’s Iolanthe – “the night has been long, ditto ditto my song and thank goodness they’re both of them over” – I end my juryman’s review with a prediction that PFI/PPP will continue to evolve and subject to much-needed revision of process and practice must be harnessed to deliver excellent projects more quickly, more cheaply and with less wriggle room.

Here is a short video explaining what we do at AF Consulting.

On the 15 November 2009 the Telegraph reported George Osborne as saying   “Labour’s PFI model is flawed and must be replaced. We need a new system that doesn’t pretend that risks have been transferred to the private sector when they can’t be, and which genuinely transfers risks when they can be.”

Of course nobody knows what Mr. Osborne really meant when he said this. PFI will almost certainly be rebranded but will it really be abolished? If so what will it be replaced with?

There is a political consensus that after the 2010 General Election public expenditure needs to be reigned in.  Although PFI was a Tory invention, it was wholeheartedly embraced by the Labour Government as a means to invest in public infrastructure whilst maintaining the pretence that its own fiscal rules on borrowing were not being breached.  There can be little doubt that a Tory Government would wish to take the hatchet to its wayward creation if for no reason other than to symbolise the end of New Labour, but are its flaws really terminal?

Let’s briefly consider the shortcomings of PFI.

The procurement process is in some circumstances overtly protracted and most certainly reduces competition. Indeed on the 24 November 2009 Partnership for Schools announced a  review to shorten the procurement process and doubtless there is plenty of scope for the process to be streamlined.

The high cost of funding PFI is a real issue but unless the Government is to use public finance to build such infrastructure then the markets will simply dictate the cost of private finance. Perhaps if there were increased appetite for investment in such projects then the cost of finance and the rates of return sought by the private sector would reduce.  If the risks associated with bidding for such projects were reduced (something that is clearly within the powers of the Government) then arguably the costs of finance will also reduce.

When George Osborne talks about inadequate risk transfer I do not believe he is talking about the construction phase of such projects. Yes PFI Building Contractors seek higher margins for PFI work but the risks that they are required to take for such margins are considerable.  Few people would argue that there is anything other than full risk transfer to the Building Contractors under PFI and a search of Google informs us of the significant losses incurred by numerous Building Contractors when their PFI contracts have turned sour.

So, if we discount the above, the only element of PFI that requires intensive care would seem to be the Operational Phase. Maybe it is this element of PFI that George Osborne is critical of?

The private sectors involvement in the Operational Phases was essentially designed to enable payment to be drip fed to the private sector on a performance related basis.  The contracts that govern the operational phase are extremely complicated and numerous concerns have been aired about the inability of the public sector to understand or indeed manage such contracts. HM Treasury has commissioned surveys into the effectiveness of such contracts and the extent to which the public sector understands and correctly operates the contractual machinery to ensure that it is receiving best value.  Perhaps surprisingly, such surveys tend to suggest that public sector contract managers are on the whole confident that they understand the Operational Contract and are confident that they are receiving the service that they are paying for.

Having spent many weeks working with operational PFI contracts   I have to say that, as a lawyer, I am surprised with the suggestion that they are generally understood and effectively operated.   I suspect that the reality is that there is considerable room for improvement and that the public sector is not necessarily getting best value for money. I would be interested to hear the opinions of those from within the public sector who work with such contracts at the coal face on this point.

PFI is not in my view fundamentally flawed but there are certain aspects of it that require treatment.

The report highlights the impact which repaying £65bn over 3 decades is likely to have on NHS Trusts facing rising costs and falling (or static) revenues. This situation is set to be exacerbated by the primacy of patient choice and GP commissioning advocated in the DoH’s July White Paper “Equity and Ecellence: Liberating the NHS”, which points the way to additional squeezing of costs and significant challenges for underperforming Trusts.

The mortgage analogy provided by Professor Appleby of the King’s Fund is apt, as is the comment by Dr Mark Porter of the BMA that long-term contracts with the private sector have made local health economies vulnerable to changing conditions.

Whilst I would not for one moment suggest that either Professor Appleby or Dr Porter fall into this category, one cannot escape the sense that the PFI ‘nay-sayers’ must be wringing their hands at this latest revelation. There is more than a whiff of schadenfreude in the air.

Over the past few years a number of academic studies have concluded that for one reason or another the procurement of PFI projects has been badly mishandled by successive governments leading to disproportionate gains by the private sector and an unsustainable burden of public debt. It has even been suggested by one leading academic that it would be cheaper for the government (of the day) to ‘buy-out’ PFI contracts than pay them off over their contractual life. In fairness the suggestion was made some time ago – certainly well before the advent of today’s recessionary pressures – and although a nice subject for academic discussion it is clearly unrealistic.

Responding to the BBC report today, the Chief Executive of the University Hospitals Birmingham Foundation NHS Trust spoke of her satisfaction with their PFI facilities for which she said they are paying around £48m annually against revenues of £500m – ie below the 10% ratio set by the last government. She cited the value [to patients] of replacing Victorian buildings with up-to-the-minute facilities – the inference being that this would not have been possible without the PFI.

The many advocates of PFI refer to its ‘opportunity value’ and claim, no doubt with justification, that in the absence of PFI hospitals, schools and other facilities could not have been built when they were most needed – if at all. Also, it is unusual to hear of a public authority which is not largely satisfied with its PFI project once operational.

So, the bottom line appears to be that by and large PFI is delivering as intended but at a cost the impact of which was perhaps not fully anticipated.

Now we come to the interesting bit. The oft-repeated expression ‘locked-in’ when applied to the public sector (and by inference the taxpayer) is taken to mean that once signed a PFI contract is immutable and cannot be broken without unimaginable penalty. Indubitably, PFI contracts are immensely complex and (if this is not tautologous) tortuous. The balance of understanding also tends to sit with the private sector, partly because it is very much in the interests of shareholders to know how to optimise each contract’s financial potential, but also because the private sector generally ensures that it has continuity of contract management whereas its public sector ‘partner’ does not.

Surprisingly perhaps, PFI contracts are not immutable and the concept of the public sector being ‘locked-in’ in the sense of being at the mercy of a Frankenstinian monster of its own creation, is to a very large extent false. In fact much can be done to re-shape PFI contracts to deliver service more nearly matching core needs – and budgets. And that is only the beginning as, upon diligent and informed enquiry, some deviation is likely to be found over time in most if not all operational PFIs, the eradication of which can generate savings and other benefits. If this is thought to be fanciful, solid evidence exists to support it.

In its report into the performance and management of hospital PFI contracts issued on 17 June this year, the National Audit Office concluded that “the Department (of Health) should work with the Treasury, who are responsible for PFI policy, to explore ways in which standard PFI contractual terms can be adapted to best encourage partnering and efficiency savings. They should consider how to fit such changes into existing contracts as well as new contracts.” This is one of a number of recommendations made by the NAO most of which have a common root, namely the inadequacy of hospital managers to find and implement latent benefits in PFI contracts. The same recommendations could no doubt equally apply to other sectors.

It is to this end, rather than a fruitless navel-gazing exercise, that the government should now be urgently applying itself.