It’s time to reappraise PFI

25 Mar 15

The Private Finance Initiative has come in for some harsh criticism over the years, decried as inflexible and expensive. But with the right approach, PFI can deliver significant savings and improved outcomes.

The Private Finance Initiative was pioneered in the UK and has been adopted, developed and progressed around the world. While it might have been born here, it has been subject to some fierce criticism and is currently very much out of favour. PFI schemes have been slated for inflexibility and poor value for money. But is this criticism always justified? There are certainly pockets of good contract management practice that are resulting in significant savings – in aggregate these run into billions – so it might be time to reappraise PFI and consider how the contracts can work harder for the public sector.

The focus on all that is wrong with PFI obscures much of what has been achieved, namely huge investment in the stock of government assets. It’s easy to forget that many schools and hospitals were in a poor state of repair 20 years ago and PFI offered a means to fund much needed improvements while also locking in a whole life maintenance programme. Had the full financial impact of the PFI commitment been known at the time would we have gone ahead with all the 700 UK PFI schemes? Possibly not, but we cannot ignore the achievements.

PF2 was launched a few years ago following intensive consultation to address the ‘failings’ of PFI, but very few PF2 projects have progressed. This is partly because of a shift away from (PFI and PF2-funded) social infrastructure, like schools and hospitals, towards big-ticket economic infrastructure, like energy and transport, which, once built, improve GDP directly. Last year, 21 public-private partnership deals worth £7.6bn were signed, including the Mersey Gateway bridge crossing and Intercity Express rolling stock, but limited legacy PFIs or new PF2 projects are being taken forward.

But this privileging of investment in economic infrastructure over social infrastructure is not sustainable. If nothing else it is important to invest to maintain the stock condition of what we have. Arguably the need for new schools, local health facilities and social housing has never been greater.

A criticism levied at PFI was that the value-for-money business case overstated the benefits of the risk transfer to the private sector in order to justify the higher costs of the PFI option. This may or may not be the case, but at least a range of procurement options were considered. In contrast, recent government capital budget funded projects do not appear to be supported by an analysis of alternate private finance options.

Another reason regularly cited against PFI is that it locks people into a contract where the private sector is incentivised to maintain the assets to a good quality across the whole life of the assets. It is not possible when budgets are cut to remove major maintenance programmes. To me, reflecting on the backlog maintenance issues I saw early in my career, being locked into a ‘whole life’ asset management approach is a major benefit.

Transparency is also cited as an issue with PFI, but anecdotally, a number of countries have been reluctant to adopt PPP arrangements because they provide too much transparency. With a PFI arrangement you will always have a Special Purpose Company whose sole activity is that project with audited financial statements filed at Companies House. There are requirements with respect to sharing financial models and often benchmarking, market testing and VFM review clauses.  Perhaps some of the criticism of PFI stems from the range and accessibility of this information. Such transparency, has also helped bring about a focus on operational savings in those schemes with problems.

There remains in some quarters an assumption that once a PFI deal is signed it runs on autopilot for the next 25 years. This is far from the case and private sector partners are constantly looking for amendments and changes that will improve their outcome. The public sector must be just as agile: VFM from a PFI does not come on contract signing but across the life of the deal and this needs active management.

There are three elements to this: improved routine contract management; enhanced utilisation; and financial interventions.

Good contract management is low-hanging fruit. Teams need to be trained up so they understand the basis for all key performance indicators and ensure deductions are reported and taken where due.

Considering whether there are opportunities to enhance the utilisation of the assets underlying a PFI arrangement is a more strategic exercise. It requires familiarity not only with a public sector body’s portfolio of assets, but also those of the wider public sector and the voluntary sector. Given the 25-year plus life of a PFI arrangement, it is unrealistic to assume that volumes, ways of working and usage will remain unchanged. Provided that the relationships between the public and private sector are good, the motivations of each party are broadly understood and returns are maintained it is possible to change the usage of assets underlying a PFI.

Financial intervention is a more open-ended area, relying on the relationships, understanding motivations and returns. Financial interventions might range from doing nothing to a decision to exit the PFI arrangement.  There are a wide range of actions that can be taken, including benchmarking  or market testing soft facilities management costs such as cleaning and catering, reviewing target profit or IRR caps and using change of ownership clauses and refinancing clauses. Outside of the contract it might be possible to negotiate the contract term, insurance arrangements, hand-back requirements, reserve funds, etc.

In conclusion, it is worth reappraising PFI. Experience shows that with the right interventions significant savings and improved outputs can be made in operational PFIs.  Such gains are far more desirable than the alternative of frontline service cuts.

  • Mark Williams

    Mark Williams, a member of the CIPFA Governments Board and Southeast Regional Council

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