The deployment of funds arranged through Prudential Borrowings raises the same issues as those arising from any other form of conventional public procurement, namely whether it is value for money for public rather than private finance to be placed at risk to the long-term successful delivery of the underlying project? In the case of construction risks, for example, it may be acceptable for the Authority to retain the risks of asset ownership and rely upon a fixed price construction contract let to an experienced contractor of suitable financial standing. This issue is not specifically related to the use of Prudential Borrowings, but rather to the form of contractual model which the Authority proposes to use. There are diverse risk management and mitigation mechanisms available to an Authority, other than PFI/PPP, all of which will require suitable provisions and/or contingencies to be include within Authority budgets to achieve parity of comparability with PFI/PPP alternatives. The strength of financial covenant available from a contractor to meet its obligations, particularly in relation to its adherence to contractual fixed prices, is particularly relevant in this regard. The essence of the PFI contractual model is to place 100% of the invested capital as collateral-underpinning for a 25 year fixed price obligation. This is not reproducible under conventional procurement, whether supported by Prudential Borrowings or otherwise.
Great care must be taken in developing contractual models which are generally uncommon within the market. The loss of value for money due to weak competition (which may arise as perhaps only one or two bidders are able to accept the proposed model) may cancel-out any anticipated gains in value for money due to the novel or bespoke features of the contractual model.
If the decision is taken to use Prudential Borrowing, Authorities will need to ensure that the waste project teams and other key players in the Authority (such as members of the Finance Team, Section 151 Officer etc) are involved at an early stage and as part of the Options Appraisal.
Authorities will also when looking at certain procurement options when using prudential borrowing will also need to consider the separation of their role as Funder and Client. Authorities will need to consider how they will manage this and deal with the conflicts that may arise.