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NAO publishes report on making changes in operational PFI projects

On 17 January 2008, the National Audit Office published its report entitled “Making changes in operational PFI projects”.

The report found that: "[i]t is inevitable that during the life of these contracts (often 25-30 years) changes will be necessary which require alterations to complex contracts. A report released today by the National Audit Office has found that PFI deals offered sufficient flexibility. However, while value for money of individual changes varied, value for money was not generally being obtained when changes were made.

In 2006, public authorities spent over £180 million on changes to operational PFI projects. The NAO found that contractors had handled urgent requests in a timely manner, 90 per cent of contract managers were satisfied or very satisfied with the quality of work done and timescales for large changes compared well with conventionally procured projects. However, larger changes were not always competitively tendered, partly owing to the complexity of integrating new work with the operation of existing buildings. The cost of making smaller changes was relatively high, varied widely across projects for similar work and took longer to process than in non-PFI projects; and almost half of the changes were completed later than the agreed timeframe. In addition the NAO found that some authorities did not have sufficient contract management resource to manage changes, despite the high value and complexity of some PFI deals.

In processing change requests, most private sector PFI partners charged additional management fees, typically 5-10 per cent, on top of those made by service providers to cover their overheads and profit, which were very often not justified in terms of the work needed to process small changes., It is estimated that, in 2006, these fees cost the public sector £6 million. Latest PFI contract guidance, issued by the Treasury in March 2007, recommends there should be no additional fees for individual changes, unless these are particularly complex.

The NAO recommend that authorities utilise the full range of guidance published by the Treasury and the help provided through its Operational Taskforce, based in Partnerships UK, both of which are designed to improve value for money in this area. Authorities should also insist on competition for larger changes that are capable of being tendered and consider carefully the need to pay lifecycle costs, challenge inappropriate costs and share information among locally managed PFI projects to ensure better value for money.

Sir John Bourn, head of the National Audit Office, said...:

“PFI deals have proven to be flexible to change and, when considering that these deals will span a number of decades, that is essential. Now that an increasing number of PFI deals are in their operational stage, and change will inevitably be needed over time, the public sector has to raise its game to get a better outcome and use the guidance and resources available, particularly as changes made to operational projects have not always provided value for money.”"

Click here for a copy of the report.