3. Is there significant risk transfer to the private sector or is it more apparent than real?
Risk transfer is real: There are numerous examples of private sector losses, illustrating that the private sector is taking real risks-when they could not manage them, they sustained losses (losses that without that risk transfer would be likely to have been incurred by the public sector).
Examples of private sector losses: National Physical Laboratory, which was terminated for non-performance in December 2004, resulting in losses for the private sector in excess of £100 million;23 the Cornwall Schools project, which has recently failed in operation and has been terminated by the Cornish LEA Council, resulting in the loss of the shareholders equity investment of £5.5 million; the Defence Animal Centre PPP which has also recently run into difficulties during operation, which the project company (with £2.6 million of equity at risk24) and its lenders are currently trying to resolve; Dudley Hospital on which the sponsors incurred additional costs of £100 million25 due to time and cost overruns during construction; Kajima Construction, which in one year lost £80 million due to construction delays and cost overruns;26 Croydon Tramlink, whose private sector operators made financial losses between 2000-03 of £18.3 million;27 Leeds Royal Amouries Museum, which the NAO reported "involved a major transfer of risk to the private sector" and which was delivered on-time in March 1996 and to budget, but which nevertheless incurred losses during operation, with the private sector's cumulative loss estimated to be £10 million by early 1999.28
Risk transfer is valuable even on successful projects: The value of risk transfer is sometimes difficult to appreciate as not all risks transferred to the private sector will materialise on every deal. The fact that risks have not materialised on some deals could be put down to the fact that they have been allocated to the party best able to manage them, and that the incentives for managing them (in the form of liabilities borne) have been set at the right levels, ensuring contractual performance. Sometimes risks do materialise, and where they have there is real and tangible evidence of both private sector equity and debt investors in PFI projects incurring significant losses (as described above) which would otherwise have been borne by the public sector.
PFI gives financial and practical protection: And it is not just a matter of financial loss. The other practical issue which is important to the public sector and continuity of service is how the aftermath of the risk materialising is dealt with, particularly when the risk impacts multiple projects. The PFI sector has been subjected to systematic shocks, shocks which have been accommodated by the private sector (for example by restructurings), and through which projects have survived. For example, when Jarvis failed29 and 27 PFI projects were affected, query whether the projects could have as effectively been kept on track had they been traditionally procured. Similarly in the case of Ballast, whose failure affected multiple PFI projects, which it was involved in as bidder, contractor or equity holder, most of which projects continued.