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Innovation in PFI Financing: The Treasury Building Project

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.

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 https://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.

PN: 52/01