The government has scrapped the use of controversial Private Finance Initiative deals for public sector IT contracts following a catalogue of costly high-profile projects.
A report by the Treasury, PFI: meeting the investment challenge, concluded that while PFI was working in many sectors, it was not delivering value for money in IT contracts.
One of the objectives of using the PFI model in IT was to introduce third-party finance into IT projects to transfer more risk to the vendor. However, botched PFI projects such as the £698m cancelled Pathway project to develop benefits payment smartcards and the £134m overspend on the Libra system for the courts have led to a major government policy rethink.
The report said: "Many aspects central to IT procurement do not fit well with the central requirements of PFI."
These include the fast pace of change in the technology sector and the fact IT costs are generally not an upfront capital sum but ongoing running costs, according to the report.
Most traditional PFI projects are also based on fixed scope and outcome such as a hospital or school but the tendency for requirements to change significantly during the course of IT projects has caused problems.
The report said: "The close links between IT infrastructure and organisational operational needs, combined with the rapid pace of technological change, frequently make it difficult to codify long-term IT requirements into an effective contract, especially over the time periods PFI agreements typically cover. Generally the service requirement in an IT contract is likely to change frequently during the course of a contract."
Within the report a study of responses from 11 operational public sector PFI IT contracts found only a fifth of projects had delivered most of the benefits defined at the outset.
The Treasury now recommends that conventional methods of procurement should be used for negotiating IT contracts and said it will be down to individual departments to decide whether to proceed on a PFI basis with contracts currently under negotiation.
IT industry trade body Intellect has welcomed the government's u-turn, saying it will lead to more successful public sector IT contracts.
Nick Kalisperas, senior programme manager for Intellect, told ZDNet UK's sister site silicon.com: "Our members have expressed disquiet about it in the past. PFI only works when there are clearly defined outcomes. With IT projects the technology and the requirements of the project change very regularly and very quickly within a long-term arrangement."
He said Intellect will be talking to the Treasury and the Office of Government Commerce through the Senior IT Forum to develop new advice on IT procurement for government departments.