3. Question 3-Is there significant risk transfer to the private sector or is it more apparent than real?
3.1 Yes, there is significant risk transfer to the private sector. John Laing have experienced this first hand with the termination of the National Physical Laboratory PFI contract in December 2004. The private sector partners, including John Laing as a project sponsor and (in that project) construction contractor, reported an overall loss in excess of £100 million.
3.2 The significance of risk transfer has been illustrated through a few high profile cases of private sector ventures going into administration, the most recent of which being the announcement that Newschools (Cornwall) Ltd had gone into administration in July of this year.
3.3 In certain LIFT projects, we are assuming full risk on the development and construction of community primary care facilities that can then be utilised by Primary Care Trusts (PCT). The financial risk on residual value of these properties remains with the private sector should the PCT no longer have need for the facilities. This innovation gives PCTs significant flexibility in their care delivery models but requires a substantial transfer of risk to the private sector.
3.4 The benefit to the public sector of transferring the risk to the private sector is that should a project encounter difficulties, the private sector contractor typically carries responsibility to remedy any significant problem, and if a facility is not completed or is not available for use by the public sector client, then the private sector partner will receive no payment.
3.5 There are also a much larger number of lower profile instances where the private sector partner has had to bear the consequences of unforeseen circumstances; but has successfully managed the implications of these to safeguard the long-term sustainability of a project. The following are examples from our own portfolio:
- M40 road project: to meet our maintenance obligations we undertook works to the Loudwater viaduct. As a result of our testing regime we identified that reinforcement of the parapets was failing, even though we had not anticipated this pre-existing condition and had made no allowance in our budget, we undertook the additional rectification works at a cost of circa £4 million, all without recourse to the taxpayer.
- All our road projects (M40, A55, M6, A130) link payment to traffic volumes, We are required to take this risk on traffic for the 25 year project period. As we have seen over the last few years, changes in oil price (and its impact on the price of fuel) and performance of the economy have had a significant impact on peoples travel patterns, consequently all our roads projects are suffering from a significant drop in traffic and a related drop in our revenue.
3.6 These examples not only illustrate that the transfer of risk is very real for privately financed projects, but also that such projects are actually highly adaptable to change; and able to manage change effectively to safeguard the long-term provision of the services.