John Hemming's Web Log John's Reference Website
Friday, August 13, 2010
  PFI is it value for money?
PFI costs a lot as the BBC have found (hat tip Bob Piper) - see link.

The government claim it is value for money. The problem is that it is not.

It is only calculated as being value for money by using an adjustment to the alternative public sector procurement cost. This is called optimism bias.

I have explained this a number of times. The last time in the house was here

We have a similar problem with the funding costs of private finance initiatives. The great difficulty is comparing all the figures involved in what is called optimism bias. I asked the Government what the optimism bias figures were for a number of different PFI projects, and they came back with a wide range of figures. Let me explain a bit about optimism bias, for those hon. Members who are not aware of it. When a PFI project is put together, there is an assumption that, if it could be done through the public sector, it would be done through the public sector, so it must therefore be done in the most cost-effective way. A calculation is made of what the public sector project would have cost, but an optimism bias is then added to it, on the assumption that the public sector calculation is optimistic and therefore too low. That is then compared to a PFI cost without an optimism bias.

The interesting thing is that people are told to pick their own optimism bias, and if the optimism bias is such that undertaking the project through the public sector is cheaper, they must do it through the public sector, but there is no money for that so it will not go ahead. Inevitably, people pick an optimism bias figure that means that the PFI looks cheaper, when it is not. Such things have been going on substantially around the country. Although the clear line of sight project is a positive move, we need to go further.
 
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