Green Book revisions

The government has pledged to deliver major improvements to a wide range of public services by the next election. It has allocated an extra £61bn to help it meet its targets in health, education and transport especially.

But these targets are threatened by the public sector's persistent under-estimation of what projects really cost and how long they take to complete. The more projects that overrun, the more they gobble up the available cash and the less money there is for further projects down the line.

To help combat this the Treasury last week announced a number of radical changes to its Green Book guidance for public sector project managers on how to appraise and evaluate projects (see box). The overall aim is to provide a more robust, transparent evaluation process, based on empirical evidence.

The Treasury believes the changes will not delay the overall delivery of schemes, be they traditionally procured or via the PFI - the area where the construction industry will engage most closely with the changes.

Perhaps the most significant change will be the placing of a greater emphasis on the benefits, rather than the costs of any project. By factoring in the long-term gains, the Treasury believes it will make it easier to decide how much needs to be spent on a project and whether it is worth spending that amount of resources for the predicted gain.

The aim is certainly laudable, but the execution is likely to be fraught. A Confederation of British Industry (CBI) spokesman commented: "This will be challenging. For example, placing a value on the benefits of reduced re-offending rates through better design of prison buildings and prison regimes will not be easy."

The unbundling of the 6% discount rate used to compare costs and benefits arising at different times throughout a project's life is designed to make the evaluation process more transparent. The main part of it will be the so-called social time preference rate - the rate at which society is willing to exchange consumption now for consumption in the future, or "jam today is worth more than jam tomorrow", as the CBI puts it.

The rate will be at 3.5% - below the current cost of borrowing. This has raised concern over where the PFI fits in. "Any change to the ground rules prompts speculation about whether the intention is to tilt the playing field towards or away from PFI," says the CBI.

The Treasury is emphatic that once the other parts of the old 6% discount rate are added back on, the changes in the Green Book will have no significant impact on the viability of PFI schemes.

The other parts of the discount rate involve factoring in costs for potential risks, including cost and time overruns. A study by Mott MacDonald of 50 projects shows that the public sector consistently under-estimates these factors (see box).

While more realistic appraisals of project costs and construction programmes are clearly welcome, there is still some confusion over the new process. Norman Rose of the British Services Association says: "As far as PFI schemes are concerned, unbundling the discount rate may make it more difficult for us to see where the other factors are. I have some difficulty in understanding how the optimism bias is going to operate. We also need to discuss how the change to the discount rate will affect PFI schemes now going to the invitation to negotiate stage. When does it kick in?"

The private sector has until 18 October to make its views on the changes known.

The industry view seems to be that the intention is good, but the implementation will be difficult. Rose says: "I think it will be very hard for public sector clients to understand and implement this by April next year. It will be hard for us too."