These projects include all PFI / PPP and concession type contracts. They are characterised by high risk transfer, including the transfer of operating risk. Commercial novelty, in the form of early PFI contracts, added cost to projects both directly at the negotiation stage through advisers' fees but also through the caveats negotiated in contracts that shifted risk back to the public sector. With growing experience in PFI and standardisation of commercial terms, the private sector is becoming more comfortable as it understands the risks involved. However, this does not apply to projects with significant technical innovation, unusual commercial structures or novel risk transfer, as these tend to experience considerably higher levels of optimism bias than standard projects. The projects assessed are all early PFI projects, so many of the issues identified are no longer significant sources of optimism bias.
The works duration overruns in these projects are low. However, the client needs to ensure during the preparation of the business case that adequate allowance is made for:
• Protracted contract negotiation (including legal, technical and financial advisory processes)
• Costs to the public and private sector of such negotiation
• Land acquisition and planning permissions
• Public relations - building a political consensus to support the project
• Variations in requirements over the length of the contract.
As more PFI / PPP projects have been commissioned, experience in dealing with these issues has grown and, as a result, the capital expenditure and works duration optimism bias levels for the client at contract award, associated with this method of procurement, are small when compared to traditionally procured projects. As experience has grown, there is now evidence of a reduction in the time and expense associated with the gestation period for these projects as the procurement process for these projects has become standardised. Previously, the gestation period for early projects was up to three times as long (and the advisory fees up to six times higher) than those for traditional procurement.
Unitary payments are made up of a capital aspect and an operating aspect. In order to minimise unitary payments optimism bias, it is necessary to determine critical project risk areas which impact on capital and operating expenditure optimism bias levels. Managing these project risk areas would reduce unitary payments optimism bias in the same way as capital and operating expenditure optimism bias for traditionally procured projects.
PFI / PPP projects procured more recently have benefited from the lessons learned during the procurement and implementation of earlier projects. Once experience was gained and precedent set, there has been greater understanding of contract structure and possible causes of time and cost overruns. Best practice guidance has also been prepared. Therefore, the expenditure and time overruns during the procurement process for more recent projects, of similar types, are significantly smaller.
The study revealed that most of the projects procured using a PFI / PPP procurement method would not have started as early as they did if public funds were required up front for the capital works. Some of the PFI projects within the Mott MacDonald study were considered low priority projects with regard to investments of public funding and would only be constructed many years later. However, with the introduction of private finance and satisfactory assessment of value for money, these projects were given the go ahead. In PFI projects the client pays for the benefits delivered over the duration of the service operation stage of the project (normally between 10 and 40 years). Payments are made once the works are complete and the new facility is ready for use.
A Public Sector Comparator (PSC) is prepared early on in the project life-cycle when PFI procurement is considered as an option. The PSC is not updated to the same detail as the business case is throughout the project life-cycle. When the PFI option is chosen and its business case developed, the PSC is also developed but to a smaller extent. Comparisons are made against the less developed PSC and so like-for-like comparisons are not performed.