The table below summarises the extent to which senior debt has fulfilled the original envisaged roles.
Role | Outcome |
Provider of finance | Yes - but no public policy purpose served |
Discipline in risk analysis / allocation | Definitely. Major cultural change in public sector procurement and risk allocation methodology |
Due Diligence | Yes. Stark contrast with non-privately financed projects |
Early warning of failing projects | Construction period: Yes. Operational period: insufficient data |
Step in and sort out failing projects | Banks have not stepped into projects even though allowed under the Direct Agreements, therefore rather disappointing |
Incur loss when projects fail | Yes, but very limited |
Key points are as follows:
• Senior debt has obviously acted as a source of finance for projects but this has not, of itself, served any public policy purposes. Finance could have been arranged from public sources just as easily. This is in stark contrast to the use of private finance in many fiscally-stressed economies where the private sector's borrowing power is what governments have been mainly interested in.
• The introduction of PFI as a mainstream procurement methodology has increased focus on the analysis of project risks and on their optimal allocation, both between government and the private sector project company, as well as between the private sector company and its subcontractors. Senior debt providers have played an important part in this, both directly and indirectly. Directly, senior lenders have contributed to the development of fair and mutually satisfactory positions on a number of thorny risk issues including, for example, insurance, change in law and inflation in soft facilities management costs. Indirectly, the knowledge that draft contracts will be scrutinised by senior lenders has arguably led to increased rigour from the outset. It can also be argued that the greater focus on risk analysis and allocation in PFI has had a beneficial spill-over effect onto other forms of procurement. For example, it would be unthinkable now for a team running a major public sector project not to have a comprehensive risk register, though this was by no means invariable practice ten or fifteen years ago. While many factors have contributed to the improvement of project discipline, it is clear that PFI has had an exemplary effect - in the literal sense - in this area.
• Senior debt has also brought greater focus on due diligence. This has had a clear and beneficial effect, the tangible result of which is the relatively few projects which exceed construction, time and cost projections, compared with conventionally procured projects. This has been confirmed by evidence collected by the National Audit Office. (See Exhibit 1, right).