1.38 The involvement of private finance in taking on performance risk is crucial to the benefits offered by PFI, incentivising projects to be completed on time and on budget, and to take into account the whole of life costs of an asset in design and construction. Private finance in PFI, particularly third-party finance, takes the risks in a project and allocates them to the party best able to manage them. The lenders to a PFI project, as they have significant capital at risk, have a powerful incentive to identify, allocate and ensure the effective management of all the risks the private sector assumes in a project. Private finance therefore plays an important part in PFI's ability to deliver value for money benefits, and will continue to be integral to its success. Paragraphs 3.54 to 3.64 outlines the role of private finance in PFI.
1.39 By involving private finance 0in PFI, the Government seeks to ensure that it receives the best value for money in securing the benefits it brings, and that its involvement is on a sustainable basis. To facilitate this, as outlined in Chapter 9, the Government intends to:
• maintain a variety of sources of funding for PFI projects to ensure competitive tension, a sustainable spread of investment programme risks across different funders, and a minimal Government exposure to systemic market risks;
• explore the provision of framework funding, particularly in bundled small PFI schemes, to provide a faster, cheaper funding solution for these kinds of schemes; and
• explore through pilot projects the potential role of a form of credit guarantee finance as an additional means of funding PFI projects. This means of financing would retain the private sector lender's risk premium and its benefical role as risk-taker and risk-allocator, but improve overall value for money by utilising the Government's ability to secure funds more cost-effectively.
1.40 The Government also seeks to ensure that the involvement of private finance does not lead to unnecessary inflexibility in privately financed projects. In a standard PFI contract, the public sector has built-in safeguards to ensure it retains the same levels of flexibility as in a conventionally procured project, including the ability to hold competitions for work to implement changes. However, in the extreme case where, because of a wholesale change in public sector requirements, a PFI contract needs to be terminated by the authority, the Government will explore further measures to ensure that termination costs do not limit this flexibility. The measures under consideration are outlined in paragraphs 9.24 to 9.37.