The UK government is abandoning the private finance initiative (PFI) for IT projects after a Treasury study concluded that they offered poor value for money.

In addition, use of the PFI for all projects costing less than £20 million will also be stopped for the same reason.

High-profile PFI IT projects in a number of government agencies have run into problems, including the Child Support Agency and the Criminal Records Bureau. The government’s outsourcing contract with services giant EDS in the Inland Revenue has also been dogged with difficulties and new IT systems for the air traffic control service were also delivered years late and suffered from a number of glitches when it went into service.

The report, “PFI: meeting the investment challenge”, concluded: “The government will… replace PFI in IT with a range of procurement models which are better able to deliver”.

The problem with IT projects is that they are subject to frequent change — often on a ministerial whim — and that they frequently need to be renegotiated after contracts have been signed and work has been started. This enables contractors to extract better terms and mitigate the risks they are supposed to shoulder under PFI.

However, officials insisted that PFI had been effective at delivering large-scale infrastructure projects, such as new hospitals, school refurbishments, housing and defence projects.

PFI was developed to involve the private sector in public sector projects. The key idea is that the private consortia selected to run the projects also share a degree of the risk should the project fall behind schedule, fail to be implemented to budget or fail to deliver the promised benefits.

It also introduces an element of efficient, private sector management that ought to keep costs to a minimum.

The private consortia finances the project, with the government paying for it over a certain period, including interest. It was introduced in the early 1990s by the Conservative government, but has been enthusiastically embraced by Labour as a means of increasing public expenditure without adding to the national debt.

However, critics say that PFI costs more in the long run because the government can borrow money to finance such projects more cheaply than PFI consortia. They also suggest that the risk-sharing arrangements often do not work in practice and leave the taxpayer to pick up the bill when projects go wrong.

Links:
“PFI: meeting the investment challenge” (Adobe Acrobat Reader required)