9.1 The Government's approach to PFI, laid out in Chapter 3, makes clear that the involvement of private finance in taking performance risk is crucial to the benefits offered by PFI, incentivising projects to complete on time and on budget, and to take into account the whole of life costs of an asset in design and construction. It is necessary for private sector capital to be at risk for it to take responsibility for the work it carries out. The involvement of third-party finance in PFI brings with it extensive due diligence work to identify, allocate and enforce risk sharing in a project that can significantly improve its value for money. The evidence presented in Chapter 4 demonstrated that these benefits of private finance are being realised.
9.2 Because of the benefits it brings, the involvement of private finance in PFI should represent good value for money, reducing the overall cost of delivering certain types of public investment. The Government recognises that to obtain the benefits of private finance there is an associated risk premium compared to the risk free rate of government gilts. This risk premium represents value for money in PFI, as it reflects the private sector taking on and managing the appropriate risks - risks which, although inherent in a project however procured, are not reflected in government borrowing. An explanatory comparison of the relative costs of public and private finance is laid out in paragraphs 3.60 onwards, which outlines how the cost of capital in a PFI project, which explicitly calculates the risks involved, cannot be compared with the cost of gilts, or government borrowing, as these rates are set 'risk-free' although there is an extra cost to funding PFI through private sector finance, associated with the higher cost of the private sector securing funding in the capital markets compared to the Government. Moreover, these costs of finance are:
• controlled by competitive pressure - not only do PFI contractors bid to win contracts, but they themselves typically put the financing arrangements out to bid;
• not the most important cost in evaluating PFI bids, as a bidder's proposals for construction and operation of the asset are likely to have a more significant effect on unitary charge; and
• a shared interest of both the public sector and the private sector PFI consortium, who both have an interest in securing value for money for the finance raised.
9.3 PricewaterhouseCoopers are publishing separately on their website a study commissioned by OGC into the rate of return bid by the private sector in PFI projects. The findings of the report are summarised in Annex C.