1.1 Private finance projects are contractual arrangements between the public and private sectors, which use at least some funding raised through the private sector, to deliver public authorities' objectives. The costs, including the finance costs, are eventually paid by the public authority through annual payments, or by the users through charges. In this context, public authorities are public sector bodies that commission the project. In doing this, public authorities manage the tendering, governance and contractual relationships for the public sector.
1.2 Most projects using private finance use a specific model called the private finance initiative (PFI). PFI projects are for the serviced provision of infrastructure, such as the construction of a building and its cleaning and maintenance over the life of the contract. This paper concentrates on PFI except where we have a specific point to make about another private finance model. Other types of private finance projects are included in Figure 1 overleaf.
1.3 The funding for PFI is project finance: all the financing for the project is tied to the project, normally in a special company set up for the purpose. There is meant to be no cross subsidy to and from other projects; the intention is that if the project fails, the finance cannot be paid back. Consequently, the cost of the private finance reflects the project's risks of failing or not having enough money to pay back its borrowings.
1.4 PFI projects typically use around 90 per cent debt finance and ten per cent equity funding. The debt finance is in the form of bank loans or, prior to the credit crunch, bond finance. The equity finance is provided by contractors or financial institutions, and comprises of a mixture of shares and loans which take second precedence to the payment of the debt finance.
1.5 As of September 2009, there are over 500 operational PFI projects in England, with a capital value in excess of £28 billion.5 There are also hundreds of other types of PPPs, ranging from small joint ventures to the London Underground PPPs with their capital value of £18 billion.
1.6 The National Audit Office (NAO) considers the accounting treatment of over 100 PFI projects and many other PPPs in our audits of the financial accounts of central Government. The NAO has also produced some 72 reports on the Value for Money (VFM) of using private finance over the last twelve years (Appendix 1).
1.7 Discussions of private finance are necessarily complex and often require a lot of jargon. Where we cannot avoid jargon, we have defined it in the glossary at the end of this report.
Figure 1 | |||
Type of model | Some examples of when used | Key technical characteristics | Selected examples of related NAO reports |
Roads, bridges, hospitals, schools, prisons, police stations, government departments, social housing, waste projects, IT projects. | A private sector consortium is appointed after competition to deliver a project; The party contracting with the public sector is usually a special purpose vehicle; There is an output specification with clear requirements; There is a long term service contract (e.g. 25-30 years); Payment is by way of unitary charge for services once they are available; Standardised contracts have been developed over time. | Allocation and management of risk in MoD PFI projects (HC 343, 2007-08); Making Changes in Operational PFI Projects (HC 205, 2007-08); Benchmarking and market testing the ongoing services component of PFI projects (HC 453, 2006-07). | |
Joint ventures | Low carbon technologies; Defence equipment; ISIS Waterside Regeneration. | The Government, in conjunction with one or more private sector parties, makes a contribution to a commercial venture, shares aspects of control and aims to share risks and returns on an agreed basis. | Dr Foster Intelligence: A joint venture between the Information Centre and Dr Foster LLP (HC 151, 2006-07); The Radiocommunications Agency's Joint Venture with CMG (HC 21, 2000-01). |
Strategic | Local Education Partnerships in Schools (LEPs); Local Improvement Finance Trusts in primary care (LIFT). | Special (often exclusive) arrangement to address infrastructure-related issues over a period of time; A private partner is appointed to deliver a flow of projects over time; It could be a joint venture or be established through a contract; The private sector partner provides most of the works and services required by the contracting authority; It is suitable for procuring a stream of projects including a "bundle" of small projects which otherwise would be too small for PFI. | The Building Schools for the Future Programme: renewing the secondary school estate (HC 135, 2008-09); Innovation in the NHS: LIFT (HC 28, 2005-06). |
Hybrid | The MoD London Estate (MoDEL); ProCure21. | Any combination of the above models in which the procurement authority adopts a very specific approach to solve unique procurement challenges; Usually associated with novel and complex projects. | Improving Public Services through better construction (HC 364-I, 2004-05). |
Local Asset | Regional Development Agencies' regeneration projects; British Waterways Board's projects. | Public private joint venture; Usually the public sector puts in land and property and the private sector puts in financial and other resources; The development of the asset is expected to yield returns to cover costs and fund development; The partners share the increase/decrease in value of the land and property, usually on a 50/50 basis; The model is suitable where there is a pipeline of projects; Often the public sector shares more of the risks and rewards than in PFI; The public sector has greater influence and leverage over projects than is usual in public private housing developments; Land banking by the private sector can be prevented by provisions to transfer assets back to the public sector if pre-agreed timescales are not met. | Regeneration of the Millennium Dome and Associated Land (HC 178, 2004-05). |
Concession | Toll Roads | A private sector consortium is granted a private entity exclusive rights to build, operate and maintain a ring-fenced asset over a long period of time (it could be much longer than for PFIs); The private sector company recovers its investment through future charges for services once the project is in operation; High risks associated to future demands; Public sector has no or little involvement in contract management. | Skye Bridge (HC 5, 1997-98); The Re-negotiation of the PFI-type Deal for the Royal Armouries Museum in Leeds (HC 103, 2000-01) |
Integrator | Ministry of Defence's projects (e.g. Military Flying Training System); Building Schools for the Future programme. | Variation of other PPPs, but the private equity is held only by a company which specialises in putting together (integrating) different suppliers rather than giving work to supply companies who are also its shareholders; The public sector authority procures a project delivery organisation (the integrator) to manage the delivery of a project through pre-procurement preparation, procurement, construction and into operation; There is scope for project risks to be better managed because the integrator only profits from the project development work, not from subcontracts; This model also has an impact on interface risks because it reduces the integration of design, build and operations, as these are carried out by businesses with no interest in the project company. | |
Source: National Audit Office and Infrastructure procurement: delivering long-term value, HMT (2008) | |||
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5 The capital value of all operational PFI projects in the United Kingdom (excluding London Underground's PPPs) is £34 billion, while non-operational signed PFI projects in the United Kingdom are worth some £12 billion.