1.5 PFI is an arrangement whereby the public sector contracts to purchase services from the private sector on a long-term basis, often between 15 to 30 years. Typically:
• under the contract the private sector will need to construct and maintain infrastructure in order to deliver the services required, hence there will be a development or construction phase followed by an operational phase;
• the private sector party contracting with the public sector will usually be a special purpose company;
• the special purpose company will use private finance, usually a mix of equity and limited recourse debt, to fund the up-front construction works;
• the special purpose company will be paid a fee - often referred to as the unitary payment - that will include principal and interest payments on the debt and a return to the private sector shareholders (which together largely repay the up-front borrowings used to fund the initial construction work) plus an amount for the services delivered. The unitary payment normally commences post-completion of the construction work once services start being delivered and continues over the rest of the contract life;
• the unitary payment will be at risk to the contractor's performance during the life of the contract so that payment will be reduced if performance falls below the required standard, thus harnessing private sector management skills and incentivising the private sector to deliver services on time, on budget and to the required standard; and
• the risk allocation between the public and private sector is well understood and involves the private sector bearing cost overrun, delay and service standard risks. Government has developed Standardisation of PFI Contracts (SOPC) which sets out a standard approach to the risk allocation between the public and private sectors and includes mandatory principles and drafting for certain key contractual clauses.
Box 1.1: Factors which should form part of the evidence base for considering PFI could be successful and VfM • a major capital investment programme, requiring effective management of risks associated with construction and delivery; • the structure of the service is appropriate, allowing the public sector to define its needs as service outputs that can be adequately contracted for in a way that ensures effective, equitable, and accountable delivery of public services into the long-term, and where risk allocation between public and private sectors can be clearly made and enforced; • the nature of the assets and services identified as part of the PFI scheme, as well as the associated risks, are capable of being costed on a whole-of-life, long-term basis; • the value of the project is sufficiently large to ensure that procurement costs are not disproportionate; • the technology and other aspects of the sector are stable, and not susceptible to fastpaced change; • planning horizons are long-term with confidence that the assets and services provided are intended to be used over long periods into the future; and • the private sector has the expertise to deliver, there is good reason to think it will offer VfM and robust performance incentives can be put in place; |
1.6 PFI is only one type of Public Private Partnership (PPP). There are many other types of PPP arrangement, typified by some form of joint working between the public and private sectors. While this guidance is intended only for the purpose of assessing VfM for PFI projects, authorities undertaking other forms of PPP which involve contracting for services on a long-term basis and the construction of assets and infrastructure funded by private finance may also choose to apply this guidance.
1.7 Because PFI is characterised by a long-term commitment by the private sector to deliver and maintain new public infrastructure and services, and given the complexity generally associated with PFI procurements, PFI will normally only be relevant for certain types of investment, therefore naturally limiting its use.