The National Audit Office (NAO) published a report in 2003 which showed significant improvements in the areas of price certainty, timely delivery and quality of assets. Whereas a report published by the NAO in 2001 suggested that 73% of government department and agencies' construction projects exceeded the price agreed in the contract and 70% delivered late, the survey in the NAO's 2003 report showed that only 22% of PFI construction projects exceeded contract price and only 24% delivered late. Only 8% of PFI projects surveyed were delayed by more than two months (3 projects of out 37 surveyed). The report also concluded that where price increases had occurred, they had mainly resulted from changes required by the public sector client.
• The benefits from due diligence derive not so much from lender's engagement of skilled professionals to review designs, construction programmes and so on; after all, public sector clients typically engage professionals of comparable skills from the same disciplines. Rather, it arises from the asymmetric exposure of senior lenders to risk i.e. they face a potential loss if the project defaults, but their upside is capped at the repayment of debt and the payment of interest. Accordingly, they have strong reasons to be exacting in their due diligence requirements, and unforgiving of any problems revealed by due diligence. Unlike discipline in risk allocation, due diligence is not a feature of PFI procurement which has, so far at least, spilled over significantly into non-PFI procurement.
• It was always envisaged that senior lenders would exert a similar salutary influence through giving early warning of failing projects as they have had in detecting bad projects at the outset through due diligence. The evidence either way as to whether this aspiration has been realised is slight, for the good and comforting reason that relatively few projects have failed. It is hard to believe that the month by month scrutiny of construction programmes and costs by senior lenders' technical advisers has played no part in the good track record of PFI projects in the construction phase. Equally, there has been at least one example of a spectacular overrun which lenders have continued to fund, i.e. Metronet (though that may be explained, at least in part, by the degree to which lenders were protected through debt underpinning). Beyond the construction phase there is little evidence either way on whether senior lenders give early warning of failing projects. A clear test will arise if and when a project runs into trouble during a costly mid-life capital replacement cycle. Overall, while it seems plausible to attribute some of the success of PFI during the construction phase to the looming presence of senior lenders and their advisers, they plainly have not blown the whistle on all failing projects. For instance, they did not do so on the National Physical Laboratory (see Case Study 3, page 12).
• The concept of step-in rights was very controversial with public sector bodies in the early years of PFI. If the project has failed why could the public sector not simply terminate the contract, pay the termination compensation and move on? Step-in rights, and the associated direct agreements, were in the end accepted not simply as an inevitable consequence of securing private debt, but presented as a potential benefit. The public sector would benefit from intervention by senior lenders in failing projects, it was argued, as they would ensure that they were successfully turned round. While, again, the stock of evidence is small (for the same reasons as explained above) such evidence as there is suggests that senior lenders have, not unreasonably, sought to extricate themselves from failing projects while mitigating their losses as far as possible. They have been deterred from stepping in by the prospect of taking on the contractor's pre-existing liabilities. This is therefore one area where senior debt has not played the role originally hoped for.
• Where projects have failed senior lenders have taken a share of the pain. The amount has varied according to the termination on compensation provisions in the contract concerned (which varied greatly in the early days of PFI), and the particular circumstances of the project. There have been clear cases of senior lender exposure, for example in the case of Jarvis (see Case Study 4, page 13). Analysis done by Standard and Poor's suggests that overall these losses have been, and will continue to be, limited (see Exhibit 2, below). But arguably what matters from the point of view of the health of PFI is that the losses have been sufficiently noticeable as not to weaken the disciplines on risk allocation and due diligence.