The Government has set out its policy on PBDFCs in the policy document "PFI: strengthening long-term partnerships". The document confirms that the Government is committed to securing the benefits of private finance through open and transparent competition.
PBDFCs serve the purpose of providing a well defined process to ensure that the selection criteria applied to the choice of debt providers1 are adequately developed, rigorous and based on a level of detail sufficient for the lenders to make an unambiguous commitment to lend.
It is not disputed that the private sector is already incentivised by the PFI procurement process to obtain competitive finance and at the time of issuing this guidance the terms and conditions upon which finance is being offered are evidence that bidders are securing competitive debt terms. Authorities will also recognise that the price of risk included in private finance debt, i.e. the net cost of private debt over conventionally funded procurement financed through gilts is a small component of the overall cost of the project, generally lower than 5 percent. Therefore it is important for Authorities to continue to focus their value for money considerations on defining their requirements and working with bidders to optimise value from the required level of design, construction, operation and maintenance responsibilities during the early stages of procurement rather than unduly weight consideration of the structure and terms of senior debt finance.
The Government recognises that in some circumstances the cost impact of running a PBDFC may outweigh the benefits (for example in procurement time and loss of innovation). Authorities should consult their departmental PFU as to whether a PBDFC is likely to be beneficial and how lenders should be involved in support of a bid. Local Government can also seek guidance from 4ps. Section 8 sets out certain factors that may influence an Authority's decision.
The intention of this guidance is that running a PBDFC should be the default option for an Authority. However, should an Authority select not to do so and instead require bidders to submit underwritten bids to comply with the Competitive Dialogue Procedure (CDP) or firmly committed finance to comply with the Negotiated Procedure then a subsequent funding competition should not be run after the selection of a Preferred Bidder (PB).
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1 The terms debt providers, lenders and senior debt are used interchangeably in this document to refer to private sector finance either from the bank or bond markets.