The case for PFI goes as follows;
• the interest rate that the private sector has to pay to raise capital for fairly routine projects like hospitals will be only a few percentage points above that payable by the public sector, but the rate is higher because the private sector takes on the risks of, for example, cost overruns otherwise borne by the public sector;
• this higher cost of capital is worth paying because it is likely to be offset by the private sector's lower construction and maintenance costs - in other words by its avoidance of cost overruns and generally more efficient construction than if financed by the public sector. The construction costs may be lower not just in cash terms but because of faster construction by the private sector. Since time is money, the faster construction speed is equivalent to a lower expenditure.
The case against PFI goes as follows;
• the private sector expects to make a profit from PFI projects;
• this rate of profit is expected to be such that the cost to the public sector of capital from the private consortium undertaking the PFI project will be very much higher than the interest rate which the public sector would have to pay to finance its own capital expenditure;
• thus the cost of the PFI to the public sector is likely to be very much higher than projects financed by the public sector. And it is highly unlikely that the higher financing costs will be offset by faster construction times and lower expenditure. In addition, there are likely to be higher transaction (or negotiation) costs associated with PFI
Who wins the argument, those who are for PFI or those who are against? The stranger to this debate might be tempted to say; "Surely this is simple. Just look at the evidence and decide". This is what I try to do in the rest of this report. I start with a model used by the consultants, Arthur Andersen, in a report for the UK Treasury.