Ian McPake: How private sector can help public bodies cope with cash squeeze

THAT public expenditure is going to be squeezed hard for many years to come is not in doubt. The level of public debt makes it certain cuts are going to happen. The only questions are where, when and by how much.

Some public authorities, especially NHS trusts, are already making noises about the difficulty of managing with reduced budgets when substantial parts of their resources are committed to paying for private finance initiative (PFI) projects. It is timely, therefore, to ask whether there are ways those costs can be reduced.

It is common to talk about the unitary payments under PFI projects as fixed for the duration of the project term, except for adjustments for inflation. But that is not necessarily an accurate way of looking at things. It is true that if nothing changes, the unitary payments will be those set out in the contract, but why should it be assumed nothing will change?

All PFI projects contain mechanisms allowing the public-authority client to propose changes to the services to be provided to it and for the unitary payments to be adjusted to take account of changes in costs arising out of any variations to the services.

While there are some constraints on what changes to services may be proposed, in principle there is nothing to prevent the public-sector clients changing the output specification to omit elements of the services or to downgrade the frequency or intensity of service provision or to loosen the tolerances applicable to performance measurement, such as response and rectification times.

One of the supposed benefits of PFI is ensuring the investment in new assets is not wasted by a failure to spend the necessary monies on maintenance; a problem that has been a contributing factor to the need for so much investment in the renewal of infrastructure built in the post-war era.

I am not advocating a return to that penny wise, pound foolish way of managing the public sector estate, but, without neglecting essential asset maintenance, there are ways in which economies can be achieved.

A starting point would be any peripheral services (ie, services not directly necessary for the relevant asset to be available for use), such as grounds maintenance and any soft services. Would it matter if the grass was cut less frequently or the windows washed less often if that saved the cost of a teacher or a nurse? Would relaxing the response and rectification period for picking up litter or replacing a defective light bulb save money that could pay for front-line services? What about turning down the heating/cooling requirements: what would happen if the specified temperature range was extended by a couple of degrees?

When public authorities are reviewing their costs to find ways to make economies and protect services, they should be holding discussions with their PFI providers to identify elements of the service requirements and/or the performance measurement system that could be varied, without serious degradation of the service levels and without risking damage to the assets themselves, so as to achieve meaningful reductions in the unitary payments.

But the onus need not all fall on the public authorities. PFI project companies, their shareholders and subcontractors are all comprised of service consumers and tax payers with a direct interest in protecting public services in the face of budget cuts yet minimising tax rises.

If their public-sector client is not coming to them, they should be taking the initiative.

PFI is often criticised for being inflexible. Here is an opportunity for the industry to take a lead and show it can respond to changing circumstances and play its part in helping the public sector to adjust to the harsher economic climate.

• Ian McPake is partner and chairman of Tods Murray LLP.