1.7 The Government only uses PFI where it is appropriate and where it expects it to deliver value for money. In assessing where PFI is appropriate, the Government's approach is based on its commitment to efficiency, equity and accountability and on the Prime Minister's principles of public service reform. PFI is only used where it offers value for money, where it can meet these requirements, and where the value for money it offers is not at the cost of the terms and conditions of staff. The Government is committed to securing the best value for its investment programme by ensuring there is no inherent bias in favour of one procurement option over another. Chapter 3 lays out in more detail the Government's approach to PFI, and its analysis of where it is appropriate and effective.
1.8 Evidence to date suggests PFI is appropriate where there are major and complex capital projects with significant ongoing maintenance requirements. Here the private sector can offer project management skills, more innovative design and risk management expertise that can bring substantial benefits. Where it is effective, PFI helps ensure that desired service standards are maintained, that new services start on time and facilities are completed on budget, and that the assets built are of sufficient quality to remain of high standard throughout their life. These are some of the value for money benefits which PFI can provide. They are outlined in more detail in paragraph 3.14.
1.9 However, PFI is unlikely to deliver value for money in other areas, for example where the transaction costs of pursuing PFI are disproportionate compared to the value of the project or where fast paced technological change makes it difficult to establish requirements in the long term.
In 2000, the Government published "Public Private Partnerships - the Government's Approach" which defined public private partnerships (PPPs) into three categories: • the introduction of private sector ownership into state-owned businesses, using the full range of possible structures (whether by flotation or the introduction of a strategic partner), with sales of either a majority or a minority stake; • the Private Finance Initiative (PFI) and other arrangements where the public sector contracts to purchase quality services on a long-term basis so as to take advantage of private sector management skills incentivised by having private finance at risk. This includes concessions and franchises, where a private sector partner takes on the responsibility for providing a public service, including maintaining, enhancing or constructing the necessary infrastructure; and • selling Government services into wider markets and other partnership arrangements where private sector expertise and finance are used to exploit the commercial potential of Government assets. This document is concerned only with the Government's PFI programme, and does not relate to or include information about investment undertaken by other kinds of PPP. |
1.10 To be effective, PFI needs to be managed as a mature relationship between the public and private sectors that recognises their mutual responsibilities. PFI relationships are very different from privatisation, in which the market and price mechanism defines the service provided. The private sector has always been involved in the building and maintenance of public infrastructure. PFI ensures that contractors are bound into long-term maintenance contracts and shoulder the responsibility for the quality of the work they do. With PFI, the public sector defines what is required to meet public needs and remains the client throughout the life of the contract. The public sector also ensures, by contract, delivery of the outputs it sets and has rights under those contracts to change the output required from time to time. Consequently, with PFI the public sector can harness the private sector to deliver investment in better quality public services while maintaining frontline services in the public sector.
1.11 While an effective client relationship with the private sector is important to ensure PFI is a success, the Government places equal importance on working with both employees and the private sector to ensure staff are protected. Equally there needs to be an optimal sharing of risks between the private and public sector. There are certain risks that are best managed by the Government and to seek to transfer these risks would either not be viable or not offer value for money for the public sector.
1.12 Where this sharing of risks is done appropriately and effectively, it is the key to ensuring that the value for money benefits in PFI projects are realised. The benefits PFI can offer, in terms of on time and on budget delivery and whole-of-life costing, all flow from ensuring that the many different types of risks inherent in a major investment programme - for example construction risk or the risk associated with the design of a building - are borne by the party who is best placed to manage them. In this way, the private sector is incentivised by having its capital at risk to perform well, and takes responsibility for the work it undertakes. Paragraph 3.29 gives an overview of the Government's approach to risk-sharing.
1.13 While the private sector takes on the major project performance risks, like cost overruns and delay, key risks in an investment project are retained by the public sector in both conventional procurement and in a PFI scheme. These include the need to make alterations in the delivery of services necessary to reflect changing needs of the public sector in the future. The Government also needs to protect the ongoing delivery of public services. For those services provided through PFI, the contract entered into with the private sector builds in major protections for the public sector to safeguard the standards of delivery by PFI schemes in public services, and their flexibility in future.