Wednesday, 3 March 2010

PFI Scheme Overruns and Costs Increase Shocker

Every now and again, you really need to know that you're part of the gang, one of the boys/girls, part of the in-crowd. It's that feeling of belonging that's needed, the reassurance that you're not out there on your own.

Nottingham City Council must have felt like that when just about every other public sector organisation had got involved with the horror story that is the Private Finance Initiative. How they must have longed to share in the dizzy excitement of timetable overruns and ballooning costs.

Happily, NCC has managed to embroil itself in such a scheme and there are reassuring signs that it is conforming to type.

It seems that NCC has started on the long and winding road of setting up a PFI scheme to renew and maintain the City's street lighting.

The thing about One of the many things about PFI is that there is quite a bit of groundwork. You have to get approval from central government, you have to get bidders in and then you have to sort out the detailed specifications of the scheme and sort out the contract. All of which is very complicated and as such requires a lot of money spent on helpful input from consultants.

It seems that the story of this particular scheme started in February 2006 when an Expression of Interest (EoI) was submitted to the Department for Transport (known as DafT to readers of 'Private Eye'). This was then followed up a year later by an 'Outline Business Case' (OBC) and a report submitted to the Executive Board at their meeting in May 2008 recommending that the scheme be pursued.

It doesn't take long for this report to make interesting reading. At para 5.1 it explains that, since the submission of the EoI barely 15 months earlier, the anticipated cost of the scheme increased by £11m to £44.6m. Oh dear.

At para 8.1.c the report states that the development costs to take the project from OBC to completion (that's just completion of setting the contract up remember, it doesn't include so much as changing a light bulb) had increased from £500k to £750k. This doesn't bode well.

The OBC was appended to the report and this included the proposed timescales which anticipated that the contract would be ready to go by 9 April 2009.

Fast forward now to March 2009 and it seems that not everything is going to plan. The development costs have now increased to £950k, an increase of £200k. Cllr Katrina Bull made a portfolio decision to approve this increased expenditure, along with an extension to the timescale which now estimates completion in January 2010. Reasons for this include changes to government rules for such schemes, one of the major banks pulling out (RBS) and one of the bidders taking over another. It's all starting to look a shade dog's dinner fashion.

So now it's March 2010 so everything is signed, sealed and delivered right? Wrong. The development costs have just increased by another £62k requiring another portfolio decision to approve it. Completion date is now expected to be September 2010.

So the original estimate for the full cost of the scheme increased by about 1/3 over the course of about a year without so much as a WTF and now the development costs of just getting the contract in place have increased from the initial estimate of £500k to £1.012m, of which £778k is going to outside consultants.

Is this really the best we can do? It must be said that most of this mess is not NCC's fault but it is of course them (i.e. us) who end up picking up the tab. It also demonstrates one of the many pitfalls in PFI in that it puts more of the risks of any major project on more volatile elements beyond NCC's control, something that doesn't have a happy record in the history of PFI.

I also think it's a bit dodgy that any cost overruns in the development stage are waved through on the stroke of the portfolio holder's pen, a situation that could theoretically continue indefinitely. I would have hoped that, seeing as the damn thing is 18 months behind schedule and has more than doubled in cost that alarm bells would be ringing and the matter would by brought in for more detailed scrutiny.

And of course it's not over yet. Assuming that everything does now go to plan, which I suppose is theoretically possible, the current street lighting workforce will transfer to the new private sector contractor, a process which is often associated with it's own world of pain. Then the contract itself will start and we'll start to find out how the private sector manages to deliver cost savings while making a profit and shelling out for the greater borrowing costs than would be levied on the public sector. Or we find out how much extra we end up paying...

Finally, I'm a bit miffed that, until I saw the most recent cost increase decision and started doing some digging around, I knew absolutely nothing about this. This suggests that very few other Nottingham council tax payers do either, as I don't think it's blowing my own trumpet too much to say that I probably take more notice of such things than the average Nottinghamite. I think this will be one to watch.


alanadale said...

Interesting that there is so much focus at the moment on cutting public spending (ie mainly sacking people) and yet portfolio holders seem to be able to access any amount of money to throw down the black holes of their errors, miscalculations and sheer incompetence.

alanadale said...

Just noticed that the 'external advisors' are costing £540,000. Has the City Council really got no staff capable of dealing with this project without having to pay over half a million quid for advice?

allnottinghambasearebelongtous said...

Actually, 'external advisers' = consultants and in the latest breakdown their fees have jumped to £778k, although part of that seems to have been transferred from the in-house costs.

And I'm not sure how you'd feel about these cost overruns if you were one of the 700 odd NCC staff who have been told that their job is at risk...

The Quizzical Observer said...

Consultants, as someone once said, borrow your watch to tell you the time, then walk off with it.

For the decision-makers, it's comforting to bring in consultants, as they can be blamed later if it all goes bosoms-up.

Meanwhile, the consultants - just like the contract managers for the PFI suppliers - are generally much brighter than those who bring them in. It's not rocket science to predict the results. Nor is it rocket science to predict that this PFI project will cost enormously more than currently predicted (or admitted, perhaps), for inferior results than currently claimed. I'd love to be proved wrong, but I doubt that I shall be.