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6. Value for Money

6.1. Budgetary issues

87 percent of respondents believed that the use of PPP had brought forward the timing of investment. Many commented that, at the time, they would not have been allocated funding to carry out conventional procurement. Capital budgets were already allocated to more pressing projects, in particular to carrying out essential repairs.

Our understanding is that these responses are an accurate representation of the reality faced by public sector managers in local authorities, hospital boards and within the water and sewerage sectors at that time.

Taking three of the sectors in turn:

• Local authority ¹⁶. At the time that the contracts in our Survey were let, the local authority capital regime in place involved, in simple terms: (i) the provision of annual public borrowing consents (together with provision of rate support grant to cover interest and amortisation costs) and; (ii) separate funds to enable local authorities to support PPP payments on a like for like basis - e.g. Level Playing Field Support ( LPFS), and the Strategic Waste Fund. Borrowing consents were allocated to local authority on a formula basis, whereas the separate funds were controlled centrally. The impact of this from the local authorities' perspective was to regard PPP as additional capital that could be used from a 'central pot' for projects that were not prioritised for public borrowing consents.
• Hospitals. The treatment of investment using public sector capital or PPP is the same. Both increase the capital charges faced by the NHS Board in line with the increase in the value of its assets. Although capital budgets, set centrally, have increased dramatically recently, we understand that there would not have been sufficient public sector capital available to fund major hospital PPP contracts (such as The Royal Infirmary of Edinburgh) at the time they were procured.
• Water and sewerage sector. In the water and sewerage sector, the majority of PPP contracts relate to improvements in water treatment infrastructure necessary to meet the requirements of the Urban Waste Water Treatment Directive. There was not sufficient public capital to achieve the specified standards by the end of 2000.

32 out of 34 authorities stated that their project was off the public sector balance sheet.

Figure 18 shows how authorities perceived value for money at contract letting, and how they perceive it now. 56 percent of authorities currently believe that the contract offers good or excellent value for money. Only 1 authority thought that the project offered poor value for money; in this case bank interest rates had fallen significantly since financial close, but the project had not been refinanced to the authority's knowledge.

Figure 18: Authority perceptions of value for money.

26 projects out of 31 that responded (84 percent) stated that a Public Sector Comparator ( PSC) had been prepared. The median saving versus the PSC was 6 percent; the mean was 13 percent reflecting extremely high savings in a few projects.

13 projects out of 36 that responded (36 percent) said that post-financial close evaluation had been carried out.

In interviews several authorities noted the difficulty of proving value for money in relation to changes, because of the lack of competitive pressure. One authority also commented that insurance costs were significantly higher for PPP projects, which had an impact on value for money compared with conventionally procured projects.

Several interviewees discussed the benchmarking process, which is now being implemented for the first time in projects which have been operational for 5 or more years. Benchmarking relies on independent experts to establish a comparator price for each service, as opposed to market testing in which alternative service providers can bid to replace the incumbent. Interviewees commented that there had been issues around interpreting the provisions of the contract and in identifying suitable comparators. One contractor noted that the private sector was starting to organise benchmarking clubs.

Interviewees reported that the outcome of benchmarking exercises to date has been to increase the price paid by authorities. Labour costs, in particular, have increased more quickly than many contractors anticipated in their bids; in the health sector this has been driven by the NHS Scottish Low Pay Agreement. A similar outcome would be expected with conventional short-term outsourcing contracts, where the price would adjust to the market rate at each re-tendering. However, some authorities expressed concern that the benchmarking process could erode value for money by allowing contractors to make up for any deliberate under-pricing at the bid stage.

Recommendation: The Scottish Executive should monitor the process and outcome of benchmarking exercises in order to inform other projects and future contracts. It should consider how best to support authorities in collating benchmarking data, for example by holding information centrally or by promoting informal networks.

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