The public sector is paying the private sector an excessive rate of return. The theory of PFI-as stated by the Treasury (2003)-is that whole-life costs will be lower than in, say, a fixed-price design and build contract. As the PFI contractor is responsible for both construction and long-term operation, there are said to be incentives to balance construction and operational costs in order to provide the lowest-cost solution overall-incentives that are strengthened by the inclusion of private finance. But there is no conclusive evidence of this.
Instead, in recent years, government attempts to justify the dominance of PFI in large-scale capital investment have focused on the model's ability to deliver projects "on time and to budget". For example, the Treasury (2003) states: "Treasury research into completed [PPP] projects showed 88% coming in on time or early, and with no cost overruns on construction borne by the public sector. Previous research has shown that 70% of non-PFI projects were delivered late and 73% ran over budget" (p 43). This conclusion has had a major impact on regulations governing the way in which public authorities carry out their PSC appraisals, in particular the calculation of risk transfer.
However, requests for the Treasury's work on cost and time overruns indicate that NO research report exists. Indeed, Treasury officials have stated this in a correspondence with the Centre.
Meanwhile, the "previous research" noted above refers to two reports from the National Audit Office, Modernizing Construction (2001) and PFI Construction Performance (2003). But neither of these studies compares performance under different procurement routes. The first is based on interviews with industry about the scope for improved construction.
The second is a census of 38 project managers. Neither study examines the relative performance of PPP and conventional procurement. Indeed, the authors of PFI Construction Performance conclude: "it is not possible to judge whether these projects could have achieved these results using a different procurement route" (National Audit Office 2003).
A major problem with Treasury and government evaluations is that comparing PPP and non-PPP projects are based on post-contractual price increases (what the Treasury appears to mean by "time and cost overruns"). This is not a valid method for testing value for money. Under a PPP, the risk of cost and time overruns is transferred to the private sector, so it has little flexibility to increase its price during capital works unless major problems emerge.
Under PPP, the private sector increases its price before contracts are signed. It is assisted in doing so by the preferred bidder stage-a post-competitive phase of PPP procurement in which the public authority enters into a long and exclusive negotiation process with a single consortium.3
During this period, the private sector can "hold-up" the public sector, pushing up prices and reducing the extent of risk transfer (Lonsdale 2005). Meanwhile, the scope for public authorities pulling out of such negotiations is limited by the unavailability of other procurement routes. In proposing that post-contractual price certainty can be taken as an arbiter of overall efficiency, the Treasury is setting up a comparison which is bound to favour the PFI method.
A project that is delivered to time and to budget (in post-contractual terms) may represent poor value for money if the price paid for the risk transfer that led to that outcome was too high.
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3 According to the National Audit Office (2007), the average length of preferred bidder negotiations for projects that signed between 2004 and 2006 was 15 months.