Using private finance creates new and complex commercial risks.
2.33 Using private finance brings risks to the public sector:
a Increased commercial risks: It is reasonable that contractors seek commercial returns from their work. But the long-term nature and high monetary value of PPPs creates opportunities for contractors to increase their profits over the course of the contract, which could adversely affect the VFM for the public sector. Public sector clients face particular pressure from contractors to alter the commercial position in the private sector's favour when finalising contracts, making changes, maintaining risk transfer and ensuring services are performed to the agreed standards. Managing such commercial risks is discussed in part five.
b Increased complexity: private finance is inherently complicated, even before consideration of the project's specific technical complexity, increasing the risk of errors in scope and mistakes in negotiation and operation. There has been a scarcity of public sector officials with suitable skills to deal with these commercial issues. This has increased the need for public bodies to place large reliance on relatively expensive advisors.
c Reduced flexibility: the specification is established in the contract at the outset and can only be changed through a set negotiation process. Although such contracts can be flexible enough (and normally are) to meet changing needs, at best the initial commercial position is preserved throughout and a contractual approach is inherently less flexible than other means of delivery.
d Termination costs: using PFI and some forms of PPP makes the cost of termination more apparent and increases the costs of termination for the public authority. A conventionally procured project that is no longer needed may still have wasted some tax revenues or Government borrowing, but this funding is not tied to the project and its cost can be overlooked in the decision to terminate.
The voluntary termination of PFI or PPP contracts by the public sector, on the other hand, requires the public authority to find the cash to pay for all the outstanding financing in one go. This reflects the fact that the asset has not been paid for up-front as in conventional procurement. But it also normally requires them to compensate the private sector for lost profits over the remaining term of the contract, which will mean higher termination costs than under conventionally funded procurement.