3.14 Where PFI is effectively utilised, it offers a number of advantages in delivering public sector infrastructure. These advantages stem from the sharing of risk in public projects within a structure in which the private sector puts its own capital at risk to delivery and performance. In the right circumstances, PFI can help ensure:
• desired service standards are maintained. Since under PFI the private sector's capital, not just its profit, is at risk depending on private sector performance, there is a very strong incentive for the private sector to maintain high and reliable service standards throughout the life of the contract;
• new services are more likely to start on time, since the private sector contractor does not get paid until it delivers. The record of conventional procurement is poor in this respect, with frequent delays before public assets become operational;
• more efficient use of public money. In the past, some conventional public procurements have gone heavily over budget, consuming funds which could otherwise have been invested in other public services (see Box 3.1). Under PFI, the public sector only pays for the service it has contracted for, at the price it has contracted for, and only when that service is available. Under conventional procurement the public sector is forced to fund cost overruns, and pays out whether or not the service it needs is actually available; and
• contractors are incentivised to deliver the required service over the whole life of the asset. The private sector partner only gets paid if it maintains standards throughout the length of the contract (for example 25 years in the case of new PFI hospitals). This means that in designing, building and maintaining a PFI hospital or school the private sector has a strong incentive to ensure high standards are built in and maintained across the building's whole life, as it would be forced to remedy defects and make repairs in the future.
3.15 Furthermore, when used properly, PFI offers other advantages to the public sector, over and above providing high quality, well-maintained assets over the life of the contract. In particular PFI helps the public sector by providing:
• a better understanding of the total costs of providing the required service. In PFI procurement, the public sector client can clearly define at the start the service it requires, and the private sector partner gives a price for the total cost of that service - covering both the up front cost of new investment but also ongoing recurrent costs such as maintenance. This helps to avoid short-termism by focusing on the long-term needs of the public sector; and
• new ways of working, and new approaches to the delivery of the service. The public sector defines the service to be delivered, but it is for the private sector partner to decide how to deliver it, drawing on its own innovation and experience. This provides the private sector with an incentive to develop innovative ways to meet requirements, and allows the public sector to harness the efficiency that can come from contestability, helping improve standards across the public sector. To bring out these benefits from innovation, it is important that the public sector has available the skills to act as an effective client in PFI procurement. Chapter 7 details Government measures designed to spread effective procurement expertise across procuring authorities, and so improve the value for money it can secure through PFI.
3.16 Where it can be effectively utilised, PFI helps to ensure that money invested flows through into improved public services. Chapter 4 lays out the findings of recent HM Treasury research designed to help evaluate how far PFI has delivered the benefits expected of it in major capital projects, and also examines two specific areas - projects with a small capital value and information technology (IT) projects - where further research was conducted.