4.48 IT PFI very rarely involves genuine third-party finance, whereas most non-IT PFI projects do. When PFI was introduced in the IT sector, it was hoped that a market for third-party finance of IT projects might emerge; however, for a variety of reasons including the general downturn in the IT sector, this has not occurred. As explained in Chapter 3 paragraphs 3.54 to 3.59, third-party finance provides a series of important benefits to PFI projects in other sectors
4.49 This lack of third-party finance in IT has had a number of consequences:
• it imposes constraints on the ability of the private sector to finance long up-front development costs, and often requires these costs to be met from corporate borrowing. This is especially significant in the context of large software development projects, in which IT service providers are often expected to finance months or years of development before receiving any revenues;
• it removes a valuable source of due diligence, which has been shown to reduce optimism bias and tighten contract terms in non-IT PFI, as outlined in paragraph 3.54 to 3.59. This makes it more difficult to assure effective risk allocation in IT PFI; and
• it makes it difficult for small and medium-sized IT providers to bid for many projects, especially considering the large size of some projects and the requirement in many PFI contracts for the private sector to finance development costs up-front. This has weakened competition for projects.