Corbs in Guardian

From the comments

Coventry and Warwickshire (hospital)
£379m (building cost)
£3,900m (pfi cost)
£86m (this years payment)

😯

Typical Guardian article misleading and selective use of data + only presenting the part of the picture that suits their dogma

Really? You aren”t seriously suggesting is anything other than a bad idea?

It is a very good idea if you want to go on a huge spending binge but keep the associated debt off the official books.

It has always seemed to me that I can see the logic in PFI – get more investment in the public sector through the enticing prospect of making a profit.

However, it has also always seemed to me that it is patently obvious that locking the contracts in, allowing unlimited profit to be extracted and allowing the co’s to ditch non-profitable contracts was a very stupid idea and seemed to go against the grain of the idea that “competition will deliver the best value and allows the market to find the point of most efficiency”.

Maybe it’s just me…?

Cranberry has it, why would the profit driven private sector of been so keen on PFI? helping out the NHS out of the goodness of their hearts? oh purleaze it was all about mahoosive profits, eye wateringly huge wads of cash coming their way.

I’ll lend the NHS a fiver.

Cranberry has it, why would the profit driven private sector of been so keen on PFI? helping out the NHS out of the goodness of their hearts? oh purleaze it was all about mahoosive profits, eye wateringly huge wads of cash coming their way.

In general the private sector likes PPP because it’s long term, secure work. The margins are not normally high, but because the income stream is guaranteed for decades, it’s something that shareholders love.

Sometimes PPP is more profitable than a similar non PPP deal, sometimes you lose money. You have absolutely no insight into the levels of profit made by contractors – you can’t just look at the payments being made by the authority and assume it’s a huge profit for the contractor, the cost of PPP borrowing alone is not cheap for the private sector.

I’m not denying that there are a number of PPPs out there which are not good value for money and some are undoubtedly terrible, but you’re seeing the worst, the anomalies, which suit a particular political/media agenda.

allowing unlimited profit to be extracted and allowing the co’s to ditch non-profitable contracts was a very stupid idea

This is just nonsense.

Coventry and Warwickshire (hospital)
£379m (building cost)
£3,900m (pfi cost)
£86m (this years payment)

Do you know how much it costs to build and run a hospital? I do. Yet I still have no idea whether the figures you posted represent incredible value for money or a terrible deal.

Oh OK – how come I keep reading about it then?

Oh OK – how come I keep reading about it then?

Like murders innit.

PFI was poorly executed. That is to say the gov overcommitted financially, didn’t use talented teams to deliver projects and put together a pretty costly process for getting projects off the ground. That doesn’t mean the private sector made a fortune across the board in PFI, we didn’t. We made lots of money on some projects yes, but on others we made a market or below market rate. If you knew the daily struggle we have trying to get construction and FM contractors to want to bid for a project, you’d understand that it’s not the cash cow that everyone thinks it is. Most would prefer to do a regular build.

Also, across the board authorities are trying to make savings on existing PFIs, this is cutting profits further (which is fine if you’re making money on the project, not so much if you’re already struggling with delivery!).

I’m not denying that some companies have made serious cash on some pretty big PFI deals, but that’s the exception rather than the rule.

Incidentally, the most recent PPP models are much better for all involved. Under PFI, clients just transferred all risk to contractors and asked us to price for it, meaning we were having to build in costs to manage a risk that we shouldn’t or couldn’t manage. This led to projects being far more expensive than they needed to be.

Gov has learned from its mistakes and now clients will sit with the risks they can better manage, making projects more economical and better value for money.

Peterfile – thanks for writing that, saved me from doing so. Would say that a key problem stems from the public sector’s inability to “do” contracts.

Ha, OK well you’re seeming well informed there. I didn’t say it’s a universal cash-cow, but I am pretty sure I have read several items explaining how non-profitable contracts have been dropped.

None of these look good though do they?

http://www.independent.co.uk/news/uk/politics/exclusive-how-private-firms-make-quick-killing-from-pfi-9488351.html

http://www.telegraph.co.uk/news/politics/9239282/PFI-firms-should-be-forced-to-share-excessive-profits-with-councils-and-health-trusts.html

http://www.theguardian.com/commentisfree/2007/sep/04/comment.politics

http://www.ft.com/cms/s/0/cc4f10b2-4951-11e4-8d68-00144feab7de.html#axzz3jzqMwePC

http://www.newstatesman.com/staggers/2014/07/save-nhs-labour-must-face-ugly-truth-pfi

I need more coffee though, feeling fuzzy still 😉

Would say that a key problem stems from the public sector’s inability to “do” contracts.

Fair enough, and that seems to be what comes up when researching, but at the same time it’s just so damn shitty to play hard-ball with public money.

I have to admit, I just don’t have the killer instinct though, can’t get my head around this stuff.

Would say that a key problem stems from the public sector’s inability to “do” contracts.

Definitely. If you’ve got something coming out of a big gov agency, it’s not so bad, they tend to have experience and expertise. You can do a motorway with a transport agency anywhere in the world and they generally know what they are doing, they’ve done it a hundred times before.

But…you could quite easily be building a £300m bridge in some provincial local authority where the biggest project their team has worked on was a school in 1998. Some of the time they’ll draw in expertise from elsewhere in gov, but quite a lot of the time they wouldn’t, whether as a result of ego or resourcing. This is a disaster for all involved.

PFI is this biggest money making scam ever and those private companies that do it should be ashamed of themselves.

Show me one PFI Trust that isn’t in major debt, or have major issues with the running of the hospital ?

Having worked in procurement in public sector I would agree that they dont do contracts well but that is more to do with people upstairs interfering and not really having a clear idea about what they want.

Also suppliers do just rinse the public sector, get on the prefered suppliers list and you can write your own cheque.

Show me one PFI Trust that isn’t in major debt, or have major issues with the running of the hospital ?

That’s the trust’s problem, not the private sector’s.

gofasterstripes – it’s not the projects themselves that are sold/flipped/dropped…it’s the debt finance which underlies the project. Basically, a PPP normally has two phases, the build phase and the services phase. The build lasts 2-3 years and the services will be provided for another 25.

The build phase, in investment terms, is high risk, since there is so much that could go wrong. The services phase however is very low risk.

What happens is banks with a bigger risk appetite will stump up the cash at the outset and then sell the debt on to a pension fund, for example, once the risky build phase has been completed. This doesn’t actually affect the delivery of the project at all.

The reason people don’t like this is because under PFI the client (and the taxpayer) would generally not see any of the gains made by selling the debt. It was banks making even more profit and people don’t like that. This is not the case any more and refinancing gains are shared, so the public sector actually benefits from the sale of the debt.

Ta duck, I like to provoke a discussion and hear from those in the know.

The REAL problem with PFI was poorly negotiated contracts which meant that the private sector was not sufficiently incentivised to perform well, ie they get paid despite poor performance. This was down to authority teams who negotiated the contracts being out of their depth and also because the market was treating fairly new ground at the time. This has been picked up gradually, but early PFIs suffered from this and these are most likely the ones you see being mentioned in the media.

It’s those projects which are a disaster since the public don’t get the service they were promised but they’re paying for it anyway.

On more modern contracts, if you underperform the financial penalties are eyewatering and lead swiftly to termination. This incentivises the contractor to deliver what they agreed to deliver.

Peterfile sums it up nicely

I’ve worked in and around PFI’s for the last 15 years and his posts reflect my experience

It’s those projects which are a disaster since the public don’t get the service they were promised but they’re paying for it anyway.

Yeah that’s also come up a lot.

That’s the trust’s problem, not the private sector’s.

Some up what is wrong with PPI [ and profit over people in general]that is the attitude of the private sector to the inability of the Trust to deliver the NHS whihc i s what most people really care about.

I also like the rationale that if the private sector underperformed it was the public sectors fault for the way the drew up the contract and being crap at contracts. Did business not perchance exploit this and take the piss?
Bit like me robbing a van and saying well he did leave the doors open – ok its not but you get the point

Some up what is wrong with PPI [ and profit over people in general]that is the attitude of the private sector to the inability of the Trust to deliver the NHS whihc i s what most people really care about.

I also like the rationale that if the private sector underperformed it was the public sectors fault for the way the drew up the contract and being crap at contracts. Did business not perchance exploit this and take the piss?
Bit like me robbing a van and saying well he did leave the doors open – ok its not but you get the point

No.

We’re not talking about a couple of back office idiots from a local authority sitting round a table with a team of slick private sector negotiators.

They have a room full of technical, legal and financial advisers.

It takes YEARS of work by them just to get a project to the stage of putting it out to tender. Years of technical, legal and financial work.

When we sit down with them to build a project, it’s not our responsibility to say “Guys, are you really really really sure you can afford this?” Jesus, that’s just ridiculous. How the heck are we supposed to know what their financial state and outlook is?

It’s definitely NOT the public sector’s fault if the private sector underperforms…but it definitely is the public sector’s fault if they agreed that in the event of underperformance there would be no real cost implications for the contractor. Again, we’re not talking about pulling the wool over the eyes of an idiot, these are senior contracts managers with a team of advisers.

Do you know how much it costs to build and run a hospital? I do. Yet I still have no idea whether the figures you posted represent incredible value for money or a terrible deal.

You’re assuming that a hospital needs to be built. There are well documented cases of relatively modest refurbs/ extensions being scrapped in favour of complete new hospitals because the PFI wasn’t sufficiently expensive enough to entice the private sector.

In my own dealings, I’m aware of PFI secondary schools who pay a fixed fee for their energy, so have absolutely no incentive to reduce gas or electricity consumption. Madness.

but it definitely is the public sector’s fault if they agreed that in the event of underperformance there would be no real cost implications for the contractor.

Often hands are tied by the political angle and also contractors walking away if that kind of clause was put into the contract. The procurement team is over a barrel, you have Government saying get it done or else, the private finance knows this so can play very hard ball and more often than not come out winners.

You’re assuming that a hospital needs to be built. There are well documented cases of relatively modest refurbs/ extensions being scrapped in favour of complete new hospitals because the PFI wasn’t sufficiently expensive enough to entice the private sector.

Not really. A huge contractor isn’t going to look at a modest refurb and a small contractor can’t touch a new hospital, so everything is already in its place. Also, the industry has been on its backside since 2008…no one is turning down anything.

People chose new hospitals over refurbs because they had a hardon for PFI. Blame your trust/MP 🙂

In my own dealings, I’m aware of PFI secondary schools who pay a fixed fee for their energy, so have absolutely no incentive to reduce gas or electricity consumption. Madness.

Normally energy is a “pass through” cost…whatever is spent on energy is passed straight through the the client and they pay the bill.

But…energy efficiency targets are crazy tight. Either you have to meet ongoing efficiency targets, which will in turn ensure that energy costs are kept low, or in newer projects the building had to be designed to meet a particular standard of efficiency, again ensuring consumption will be low.

I’m sure there are old contracts out there where the contractor is making money on consumption risk, but it’s probably pre 2000

Not really. A huge contractor isn’t going to look at a modest refurb and a small contractor can’t touch a new hospital, so everything is already in its place.

People chose new hospitals over refurbs because they had a hardon for PFI. Blame your trust/MP

The point is that only PFI money was available. Refurbing existing infrastructure would’ve required traditional public spending.

I’m sure there are old contracts out there which the contractor is making money on consumption risk, but it’s probably pre 2000

2005-2008.

The point is that only PFI money was available. Refurbing existing infrastructure would’ve required traditional public spending.

Ah right I see what you mean. Yeah, that’s always been a problem. Ideally it would have been nice for everything to have been capital funded and on balance sheet, but as I said earlier, they overcommitted to PFI and had no idea they were doing so.

Was the contract signed in 2005-2008? If so, that’s SOPC3 sort of time (SOPC4 came around in 08 from memory). If its a fixed fee it effectively means that the contractor has taken consumption risk. This can either make the contractor money or lose it money. If utilities costs go up it will bear the brunt, if they go down it makes additional profit. As I was saying earlier, authorities used PFI to push any risk they could on to the private sector. But obviously they have to build costs in for that risk.

T1000 – Member

Typical Guardian article misleading and selective use of data + only presenting the part of the picture that suits their dogma

That’s an interesting comment.

Presumably the “typical Guardian” reference means that other newspapers such as the Sun, the Daily Mail, or the Telegraph, don’t in your opinion publish misleading articles to suit their dogma.

It’s not an opinion which I’ve heard before, and I have to say quite frankly not very believable.

In fact it probably says far more about your own bias than the bias of the Guardian.

PFI was a good idea but in many cases the contracts are VERY poorly executed. IMO classic case of devolving power and authority to people (hospital administrators) without the right (financial) experience. The contracts should have been centrally negotiated or at least standard templates drawn up with input from professional advisors.

One other aside historically facilities like hospitals and equipment where just built and paid for by government and the people running them had no real understanding of the costs. When you suddenly put those people in charge of financing the investments not surprisingly they mess up.

Was the contract signed in 2005-2008? If so, that’s SOPC3 sort of time (SOPC4 came around in 08 from memory). If its a fixed fee it effectively means that the contractor has taken consumption risk. This can either make the contractor money or lose it money. If utilities costs go up it will bear the brunt, if they go down it makes additional profit. As I was saying earlier, authorities used PFI to push any risk they could on to the private sector. But obviously they have to build costs in for that risk.

The effect of the contract (couldn’t tell you when it was signed – schools were built in the period I gave) is that we have modern, notionally efficient buildings with appalling energy consumption. And the schools (understandably) are not motivated to do anything about it. One of the PFI contractors offered recently to build a solar pv panel on the school (showing off their oh so green credentials). In return they would keep the fee-in tariff and charge the school for use of the electricity generated. Wow, thanks!

I remember when I completed my training as a lawyer over a decade ago. I was given a choice of job (and therefore career path): join the PFI team or work in M&A.

I had always wanted to work in MA&, so the choice was easy. But one of the things that assisted in that decision was the experience at the time of a boom of PFI projects (and so a guaranteed career path for me) being so poorly handled by so many public sector people without the skills to negotiate a decent deal.

No doubt many of the private sector people subsequently turned poacher to gamekeeper and evened things up, but the damage was already done and public perception tainted.

we’re not talking about pulling the wool over the eyes of an idiot, these are senior contracts managers with a team of advisers.

Ah forgive my confusion as you described them as

the gov overcommitted financially, didn’t use talented teams to deliver projects

[quote]you could quite easily be building a £300m bridge in some provincial local authority where the biggest project their team has worked on was a school in 1998. Some of the time they’ll draw in expertise from elsewhere in gov, but quite a lot of the time they wouldn’t, whether as a result of ego or resourcing. This is a disaster for all involved.[/quote]

This was down to authority teams who negotiated the contracts being out of their depth

see also poster above

being so poorly handled by so many public sector people without the skills to negotiate a decent deal.

It’s largely a UK problem and more evident at the lower end of the scale.

On big, centrally procured jobs (with a few notable exceptions) they put in place a highly skilled team. But the further down the chain you go in terms of complexity and value, the more likely you are to encounter a client that needs their hand held. Granted, they’ve still got their advisers at the table, but as you know you can’t tell clients what to do, so it’s of little use if they just don’t get it. Which makes things tediously slow and difficult.

A £2bn infrastructure project of mind boggling complexity can actually be a breath of fresh air after grinding out a £25m deal with an unsophisticated local authority team.

It’s very different elsewhere in the world. Other states seem to centralise things a lot more and are not scared to spend a bit of cash early on bringing in a “commercial client” from the private sector to act as agent.

Some of the toughest deals I’ve done are the easy ones that have been handed to an inexperienced team. That’s no good for anyone. Despite what people think, we don’t see that weakness as an opportunity to increase our profits, it’s not that simple. Instead we usually regret having won the job and wonder how difficult the next 25 years will be.

Ah forgive my confusion as you described them as

They are not idiots, they’re just not set up to deliver major infrastructure projects. It’s not that they are making decisions that makes the private sector rich, it’s that they lack the ability to deliver what their department ultimately wants.

My point was that it is almost impossible to pull the wool over their eyes, ie trick them into certain positions. I think that’s what many see the private sector as doing and that’s how it made windfalls. It’s extremely difficult to bully/trick a client when they’ve got a magic/silver circle experienced legal team sat beside them.

It’s not like that at all, it’s just that their lack of PPP expertise means they are inefficient and often struggle to get it all to hang together…which can have cost implications for both sides in both directions.

To give you an idea…I’ve probably done about a dozen major light/heavy rail projects globally. If I sit down in a room with a local authority team who have never worked on a rail project before and tell them that something on their project won’t work because I’ve seen it time and time again, do you think they will listen to me, the big bag private sector lawyer with the contractor’s interests in mind…or do you think they will carry on regardless? The nature of our relationship means that most authorities will never be able to truly draw on the experience of the private sector, which means they’ll never truly get good value.

Also, if you were about to design and procure a £500m project…don’t do it and then tell the private sector what you want…ASK them what they can deliver first! It’s illogical. I’ve lost count of the number of times we;ve got to bid the thing and thought “what the hell are they doing it like this for? We could do it so much better/cheaper if we did it like this” But by that point they are married to their original idea/design.

It’s also getting across the concept to clients that risk isn’t ‘bad’ necessarily. Risk you can manage may provide opportunity, but senior managers very often want to de-risk completely and push the costs of that across to the private sector. They then act all confused and put out when the private sector a) prices for something they can’t control meaning the costs go up and b) doesn’t want to share the upside.

And I worked mainly public sector side.

The other thing to consider is that the public sector is very averse to variable costs due to how they’re funded. Therefore a key principal behind how these contracts were to be set up was to provide long term budget certainty. Therefore the negotiating team quite often are constrained in their ability to accept positions that they know very well would lead to better positions because they ‘could’ also lead to much worse ones too.

This is then further exacerbated by politicians both local and national getting involved as they have a 5 year lifespan and everything they do is focused on short term reward cycles whereas PFI/PPP is done over much longer periods. Some of what you’re seeing now imay be partly down to short term gains being loaded on to contracts at the expense of later impact. I’ve seen proposals from Councils for low priced starts with above rpi indexation for the whole of a 25 year contract.

If I sit down in a room with a local authority team who have never worked on a rail project before and tell them that something on their project won’t work because I’ve seen it time and time again, do you think they will listen to me

So… hang on a minute..

Feckless public sector people seem to crop up a lot here, but why is that? Perhaps if they kept more skills in house this would not be so much of an issue?

Certainly would bloody well help in IT, and help stop companies like the ones I’ve worked for in the past fleecing the public.

Perhaps if they kept more skills in house this would not be so much of an issue?

But in general those that have the skills and aptitude tend to leave where as they retain those that can’t. (Not exclusively but…)

On top of that what would the team of rail experts do when you are not building rail projects? Not exactly keeping up with current stuff unless reading stuff on the internet counts.
Central government control of some of these things would be preferable. It’s always nice to read some well reasoned responses from those involved in the process.

As I’m currently dealing with 2 new hospitals and some other stuff it makes lots of sense as to how things have ended up where they are.

Some of what you’re seeing now imay be partly down to short term gains being loaded on to contracts at the expense of later impact. I’ve seen proposals from Councils for low priced starts with above rpi indexation for the whole of a 25 year contract.

@mrhoppy nails it

mrhoppy – dead on.

I’ve got an issue at the moment where the client is trying to pay for us to manage a risk that is absolutely impossible for us to manage. Granted, it’s not much easier for them, but where is the sense in just throwing public money at every risk you have so that you can sleep a bit more easily at night? It’s using the private sector as an insurance policy, but we are surely the least cost effective insurer imaginable! 🙂

Feckless public sector people seem to crop up a lot here, but why is that? Perhaps if they kept more skills in house this would not be so much of an issue?

I honestly don’t think the public sector people I’ve dealt with are feckless and apologies if it’s come across that way. It’s just that simply designing, building and maintaining a huge building/road/railway is complex enough…adding in the finance layer makes it even more so and it’s very specialised. Most of these teams just aren’t set up to deliver that kind of thing. We have an entire floor here of specialist lawyers, bankers, technical guys etc who try to bridge the gap between a regular D&B and a PPP project. It’s the finance that makes it unique and it’s that aspect where the local authority teams fall down IME