7. The structural features of PFI mean that value for money is secured from private finance projects in a number of ways, and that PFI has delivered on complex public sector investment where traditional forms of procurement have failed.
8. One of the reasons for this is that the PFI integrates project design and service delivery, so service providers are responsible not simply for building infrastructure but for maintaining it, running the services and upgrading them as required. This encourages rigorous early planning and ongoing innovation over the course of the contract. Also, as the private sector partner is responsible for all service delivery, there is an in-built incentive for them to strive for design innovation.
9. Under traditional processes, infrastructure and assets were procured and designed separately from the services they were built to support, resulting in uncoordinated projects that failed to deliver on public policy objectives. Additions were at times made in a piecemeal fashion that raised costs and failed to meet user need, and maintenance was often omitted from plans. Suitability for purpose was at times overlooked, such as in hospitals whose corridors were too narrow to accommodate patient trolleys properly.
10. PFI overcomes this problem by adopting a strategic approach to the investment, establishing from the beginning how project outcomes can most effectively and efficiently be achieved. Collaborative planning and knowledge-sharing between the public authority and the private sector partner provides opportunities to agree on specifications that are technically optimal and can deliver the services that are needed in the most cost-effective way. Small changes to measurements or spatial planning have produced tangible improvements, such as in PFI hospitals where changes to the distance between wards and corridor width raised productivity amongst hospital staff.
11. The development of a joint project plan also enhances the feasibility of a project and provides a long-term blueprint to guide the project, from procurement, to construction, to service operation and any required modifications over time, through to contract management. External assessment, for example through the Treasury's Project Review Group, ensures projects have a valid business case and can achieve their objectives within the stated budget.
12. In addition, PFI transfers financial and operational risk to the private sector, which embeds rigour and accountability in project planning and delivery. Traditionally procured projects have been poor at identifying, quantifying and transferring risk, and as a result many projects were subject to an optimism bias that failed to take account of the many variables that impact on time, cost and outcomes. PFI allows the public sector to dispose of risk management functions that are not within its core capabilities and instead concentrate on strategic policymaking and performance management of the providers.
13. The financial risk borne by lenders when committing private capital to projects ensures that greater due diligence is applied to projects. The risk to debt finance is asymmetrical in that it does not share in project returns, but does suffer losses; therefore debt is particularly motivated to ensure that risk management is effective. As the reward to equity providers comes at the end of the project, they too are encouraged to address and manage risk from the project's beginning until its completion.
14. Operational risk is also transferred to the private sector under the PFI model, due to the private sector's proven experience and expertise in delivering public services that meet public policy goals. By staggering payments on the basis of agreed contractual milestones, the governance mechanisms embedded in PFI force the contractor to deliver on time and to budget and to constantly ensure that services are meeting the needs of citizens. As greater risks emerge as a result of the recession, particularly in the construction sector, the risk transfer feature becomes an important buffer against public sector loss.
15. PFI increases accountability and transparency in both financial and operational terms. By drawing a clear distinction between the purchaser of services and the service provider, both parties are incentivised to prioritise high-quality public service outcomes and taxpayer value.
16. Service failure is seldom quantified or penalised in traditionally procured, publicly funded services. The absence of rigorous evaluation systems limits the public sector's ability to assess the benefits of their investment in a number of areas, including how outcomes were achieved, whether benefits outweighed costs and if users were satisfied.
17. Contractual features such as key performance indicators (KPIs) embedded in PFI contracts provide a means of assessing performance. This enhances provider accountability as payments often depend on the achievement of these indicators. For example in prison PFIs, incidences such as prisoner escapes, drugs or assaults are explicitly linked to KPIs and can result in financial penalties if the provider underperforms. As the market has developed, these performance measurements have become more robust and challenging for providers, with contractual payment often depending on evidence of their attainment.
18. Partnerships UK found that whilst high performance levels have meant that financial deductions have generally been of low value, almost all projects that incurred a deduction reported high levels of service following the (72% reported good or very good performance).1 In most cases, the deductions tended to be highest in the first year of operation and generally reduced in the following years,2 showing their utility as a means of encouraging providers to meet KPIs.
19. The whole-of-life approach in PFI, which commits providers to a 25 to 30 year programme of work, brings long-term value and sustainability by focusing attention on what will bring savings over the life of the service, rather than what would be the cheapest option in the short run.
20. Traditional procurement methods widely failed to quantify a project's true costs over its lifetime, and did not include costs such as wage inflation, energy cost fluctuation, on-going maintenance, equipment replacement and eventual re-tendering/decommissioning of the service. And while other procurement routes have successfully adopted this approach at design and build stage, such as the prime contractor model, PFI extends whole-life costing to the service delivery period.
21. In PFI, the private provider is incentivised to ensure that the investment remains suitable to users in the future, as they are responsible for service delivery over the longer term. Full cost projections are calculated at the outset of the procurement, including for future changes such as technology upgrades for schools, structural additions to hospitals, or clinical needs in primary health care. This increases transparency and gives the public sector greater value for money.
22. Operating costs can also be optimised by a partner who is involved over the life of the project, and a focus on outcomes enables providers to innovate, delivering cost savings that can be shared between the public authority and the provider. Funds are often ring fenced for the latter stages of the contract to ensure that the asset and services will be maintained; this ensures users continue to get the standard of service that was originally envisaged, and saves funds by attending to maintenance needs as they arise and not when the asset has depreciated.
23. In addition, PFI can support variations to project specifications to ensure changing service needs can be met. As PFI contracts are long term, it is inevitable that over time changes will be needed to the services and assets provided. PFI contracts can enable this, and around 90% of contract managers surveyed were satisfied or very satisfied with contract changes.3 Furthermore, it was found that the timescales for agreement and completion of large changes to contracts (which constitute over 90% of changes) compare well with conventionally outsourced refurbishment or upgrade work in the public sector.4
24. At least half of PFI projects have contractual provisions requiring the value of certain services, such as catering or cleaning, to be tested at intervals, typically every five to seven years. This gives both the public and private sectors the opportunity to renegotiate the prices of the services tested in line with market rates. In an NAO study detailing three such market testing exercises, it was found that all had been run competitively and had identifiable benefits.5
25. Recent changes to accounting practice in the public sector have resulted in the inclusion of privately-financed projects on departmental balance sheets. The CBI supports this move as a way of ensuring government is transparent about its spending decisions, and that decisions about project design and delivery are not influenced by accounting treatment, but only by what delivers the best value for the taxpayer.
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1 Partnerships UK op cit
2 "The operational performance of PFI prisons," National Audit Office, June 2003
3 "Making changes in operational PFI projects," National Audit Office, Jan 2008
4 Ibid
5 "Benchmarking and market testing the ongoing services component of PFI projects," National Audit Office, 2007