Plans to scale back PFI for ‘soft services’

Treasury plans to apply a much stricter test of whether “soft services” such as cleaning, security and ground maintenance should be included in future private finance initiative projects brought protests on Wednesday from the companies that supply them.

The move, which Treasury officials acknowledge is likely to mean fewer projects including soft services, will “break up the united structure for the delivery of building, maintenance and service delivery”, according to Norman Rose, director-general of the Business Services Association, whose members provide such services.

He said the government had “failed to grasp the real nature of the contribution which PFI offers to the modernisation of public services”.

The Treasury’s move, outlined in a new overview of PFI policy published on Wednesday, follows research showing that, while soft services provided under PFI are in general no better and no worse than those provided in more conventional outsourced contracts, their direct involvement in PFI “has not led to a step change in delivery in this area”.

The Treasury said it would therefore “strengthen its value-for-money test for including soft services in future”. In addition – where they are included – rather than merely “benchmarking” the price charged for soft services they should be periodically market tested.

The move is likely to receive at least a lukewarm welcome from the unions that oppose PFI, although in practice many of the services are likely still to be outsourced rather than provided in house.

But the Treasury paper, entitled “PFI: Strengthening Long Term Partnerships”, received a broad welcome from the PFI community, underlining the government’s continued commitment to the private finance initiative.

Despite some reductions in planned hospital building there remains a £26bn pipeline of more than 200 projects due to be signed in the next four or five years, one of the largest private finance programmes in the world.

Tim Stone, chairman of global infrastructure at the advisers KPMG, said the message that the PFI was going forward “steady as she goes” would “restore an awful lot of confidence in the sector”. Construction companies in particular had been worrying that the Treasury was going cool on the procurement method and had been increasingly looking overseas for business, he said.

The questioning of soft services “presents a challenge to the BSA and the CBI to come up with better ways to make them work”, Mr Stone said.

The paper also outlines a number of models for using private finance more flexibly in future, including hiring an “integrator” who would help prepare projects better before they go to the market and then let sub-contracts for the project thereafter.

After complaints about the cost and difficulty of changing services under a PFI project once it is operational, the paper says the Treasury will “assess whether there should be changes to the standard PFI contract to make variation procedures more flexible and efficient, and payment performance mechanisms more effective”.

The guidance on value for money assessment is also to be changed “to help authorities choose an optimum level of contractual flexibility in any PFI proposals”.

Greater flexibility is likely to cost more. But the Treasury is offsetting that by demanding more competitions for the funding of PFI projects to ensure that authorities borrow the money for these 25 to 30-year projects at the best rate.

It is likely also to set a cap on how long the projects can run for in each sector amid evidence that some purchasers are lengthening the contracts – in some cases to well beyond 30 years – in an attempt to make them look more affordable.