Press Release - Innovation in PFI Financing: The Treasury
Building Project
9 November 2001
Sir John Bourn, Head of the National Audit Office, told
Parliament today that the funding competition used to finance the
refurbishment of the Treasury building in Whitehall saved the
taxpayer £13 million.
The competition resulted in savings of 7% of the cost of the
deal over the lifetime of the project and assisted greatly in
getting standard PFI contract terms and conditions accepted by
financiers, thereby simplifying the PFI procurement process.
The use of a funding competition in a public sector project was
innovative and therefore involved some risk, which the Treasury and
its advisers managed effectively. The successful outcome was
dependent on the strong project management teams assembled by the
Treasury and Exchequer Partnership, assisted by experienced and
well qualified advisers.
The report notes that there had been a hiatus in the procurement
of the deal and therefore there were good reasons for the Treasury
to inject further competition into the project using a funding
competition. The success of this competition raises the question as
to whether funding competitions should be used in future PFI deals.
The report recommends:
Departments should always consider whether a funding
competition will improve value for money
In order to ensure that competitive pressure is maintained,
departments should reserve the right to require a funding
competition to be held. But there are substantial risks involved in
running a funding competition and many projects might not be
suitable. Before deciding whether a funding competition should be
held the department must consider many factors such as the
complexity and size of the project and the experience of the
project management teams and their advisers.
Funding competitions require thorough
preparation
Once a decision to pursue a funding competition has been taken,
the process needs to be well planned. The department will need to
be supported by high quality advisers selected through competition.
Wherever possible, departments should use the standardised PFI
contracts issued by the Office of Government Commerce.
Always examine bidders’ funding arrangements
Given the risks and complexities of a funding competition, a
department may rightly decide that a funding competition is not
appropriate. In this case the department should examine the final
funding proposals of the bidders to ensure that they are
competitive. Departments should aim to incentivise bidders to seek
the most cost effective form of financing.
Sir John Bourn said today:
"The Treasury has demonstrated that there is scope for
innovation in the Private Finance Initiative and was rewarded with
a significant improvement in the value for money of this deal. Good
planning, strong management and the use of skilled advisers were
integral to this success. I recommend that other departments
consider whether this approach is appropriate when putting together
future deals."
Notes for Editors
HM Treasury building, which is nearly 100 years old, occupies a
prominent position on the corner of Parliament Street and Great
George Street. It has been in need of refurbishment to make it a
modern and efficient office space for many years. In 1995 the
Treasury began a PFI procurement process to appoint a private
sector partner to undertake the work. In September 1996 a
competitive procurement process selected Exchequer Partnership as
the preferred bidder. In July 1997 negotiations were terminated
whilst the priority of the project was assessed in relation to
competing demands on expenditure. Negotiations were resumed with
Exchequer Partnership in October 1998 and the deal was completed on
5th May 2000. The Treasury plan to occupy the
refurbished western end of the building in the summer of 2002. The
35 year deal has a net present value of £170m.
HM Treasury re-opened negotiations with Exchequer Partnership on
the basis that the project funding would be obtained via a funding
competition. This is the first time a competition has be used to
finance a PFI deal. The competition resulted in the project being
financed by an index-linked bond that was insured by Ambac.
Press notices and reports are available from the date of
publication on the NAO website at http://www.nao.org.uk/ Hard copies can
be obtained from The Stationery Office on 0845 702 3474.
The Comptroller and Auditor General, Sir John Bourn, is the head
of the National Audit Office employing some 750 staff. He and the
NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 52/01
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