3. There are two discrete assessments of costs and benefits of a PFI project: one focuses on the underlying project itself and the other focuses on the financing method (public vs private). We address the latter.
4. The main benefits of Private Finance arise from the improved management of risks transferred to the private sector. The involvement of senior lenders should ensure that all risks are identified, mitigated and managed resulting in a comparatively mature project before contract signature. The key costs of Private Finance relate to the higher cost of borrowing and the inflexibility of project finance solutions to certain changes.
5. Value for money (vfm) analysis, on how to finance a project (public or private), tends to focus on comparing the costs of finance whilst accounting for the value of risk transfer. It is important to recognise that the valuation of risks is in part evidence based and in part subjective and will always remain open to challenge. HM Treasury2 provides guidance on the type of projects that are most likely to deliver vfm under Private Finance.
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2 HM Treasury (2006) Value for money assessment guidance.