At April 2006, 700 PFI transactions had reached financial close, with a total capital value of £35.5 billion.119 Partnership arrangements are being used to procure a vast range of infrastructure including hospitals, prisons, roads, schools, computer systems and government accommodation. The British Government's experience and approach has served as a model for partnership arrangements in other jurisdictions. And because it is one of the few jurisdictions where some projects have reached maturity, analysis of project outcomes is possible.
HM Treasury noted that the use of the terms 'PPP' and 'PFI' which refer to government relationships with the private sector, can cause confusion and are often used interchangeably. It defines the difference between the two, however, in terms of PFI being a procurement tool and PPP as being an ownership structure, noting that:120
The vast majority of PFI contracts represent a liability for a stream of payments that stretches over the long term, and which the government will have to meet from revenue expenditure in the year in which they are liable. In a PPP deal by contrast, the government owns an equity stake in a company, an asset, and this is therefore different in kind from a PFI transaction.
It is evident from this distinction that the broader policy use of the word partnership in the Partnerships Victoria model does not imply fundamental differences to a UK PFI transaction.
The private financing of public infrastructure in the United Kingdom over the past decade has been characterised by a large number of projects delivered in the midst of continued controversy.121
Wide reviews on this method of project delivery have been undertaken, importantly including several formal and high level reviews. Britain's experience with PPPs and PFIs has delivered some spectacular successes such as the DBFO (design, build, finance and operate) roads program122 and some failures such as the Railtrack and IT projects.123 A number of innovative governance developments have been initiated, and Britain is now regarded as a world leader in this technique in terms of consulting advice.
Several reviews undertaken by the United Kingdom Public Accounts Committee, the United Kingdom Audit Office, the United Kingdom Treasury provided useful information about their experiences with PFIs, particularly in relation to social infrastructure. Appendix 4 provides a summary of this information.124
Evidence received by the Committee highlighted the following issues in relation to PFI/PPP projects in the United Kingdom:
• PPP transaction costs were high and appear likely to remain relatively so despite the development of templates;125
• views on the usefulness and effectiveness of the public sector comparator (PSC) varied. Several witnesses said that it was of limited value and was capable of being manipulated to produce a desired result. These witnesses saw the comparator as being largely discredited, and more art than science.126 Others, however, regarded the PSC as a useful decision making guide;127
• gain sharing arrangements had improved from early days where the private sector gained from any refinancing of PFI projects. A protocol has been developed to provide for a 50/50 split between the government and the private sector for any projects refinanced on more favourable terms;128
• PFIs have considerable time allocated to detailed planning and are more likely to be delivered on time and on budget;129
• the overwhelming response from the business community was that it was not opposed to information about contracts being available to the public on the web;130
• the life cycle approach to project procurement and management was seen as advantageous because it ensured the inclusion of maintenance requirements within administration processes;131
• significant concerns existed about the capacity of government departments to manage PPP contracts, given the length of contracts (some for 20-30 years), and the loss of corporate memory;132
• there was a clear need for a public interest test;133
• several witnesses noticed the change in rationale in the United Kingdom from earlier days when off-balance sheet objectives changed towards fiscal objectives (the provision of extra resources), and value for money objectives (lower costs and improved quality). It was also noted that the fiscal objectives were essentially 'a bogus argument' that confused financing and funding;134
• PFI projects were now seen to be less suitable for information technology, and for small capital value projects (less than £20 million, or A$50 million), and in cases requiring specific people services such as in health care, or in frontline services such as defence;135
• PFI projects seem to be driven by tight fiscal rules designed essentially to win the trust and maintain image with financial markets, in other words, a debt adverse government philosophy;136
• although risk transfers are part of PFI contractual arrangements, there are limitations on how far a government may transfer risk because the ultimate responsibility rests with government itself (National Insurance data, Passports Projects in the UK).137 '… at the end of the day the buck starts and stops with the elected government';138
• PFI projects were reported as comprising 12 per cent of the United Kingdom Government's infrastructure projects, although in some sectors (hospitals) over the last decade there have been few projects that were not PFI projects. Previous contractually oriented arrangements for delivery and management of infrastructure had broadened to now include new governance arrangements, including public interest companies (for example housing associations), not for profit companies, including public enterprises (Railtrack, hospitals) and others such as credit guaranteed finance (where the public sector guarantees finance and the private sector delivers agreed risk bearing);139
• the government was looking at expanding the PFI concept into different models;140
• projects under 20m GBP are 'bundled up' so that one contractor can do 5-6 schools141
• the Gateway process was essential to ensure that any potential problems were quickly resolved;142
• a sensitive issue was labour relations (workers rights) for those affected by the transfer between the public and private sectors;143
• the largest single area of PFI projects was schools, which had a mixed result;
• the value for money mechanisms were described as 'a vast array of assumptions', rather than a science;144 and
• the PFI projects are the only game in town, and driven by PFI credits. If departments did not follow this route then projects were unlikely to receive funding.145
Although 'the framework [Partnerships Victoria] is similar to that adopted in the United Kingdom',146 there are some notable differences. The Partnerships Victoria policy tends to be more of a one-off approach compared with that in the United Kingdom, where contracts are standardised and multiple projects are pursued so that once a blueprint is available, several projects can then be undertaken efficiently:147
... there is not the UK model where you do one hospital and then do 30 afterwards and so people become accustomed to all the issues and it becomes a bit of a blueprint and they run them off. We tend to have one-off projects …
An academic has identified the following differences between the Victorian and United Kingdom processes:148
• the possibility of the PFI scheme is discussed with potential bidders after discussion of the original specification.
• negotiations occur prior to evaluation of bids in the United Kingdom, whereas all Australian procedures reviewed provide for negotiations after evaluation of the detailed tenders and a preferred proponent has been selected.
• there is a test of actual risk transfer to the private sector prior to award to ensure that at least 70 per cent of PFI risk is transferred.
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119 HM Treasury (UK), PFI: meeting the investment challenge, July 2003, p.19
120 ibid., p.118
121 PFI 'More expensive than public funding', Staff and Agencies, The Guardian, newspaper, 11 October 2002
122 Office of Government Commerce, UK (2002) ' OGC PFI Material ' , see: www.ogc.gov.uk/sdtoolkit/reference/ogc_library/PFI/series_other/library/dbfo/dbfo_contents.html
123 HM Treasury (UK), PFI: meeting the investment challenge, July 2003, p.54
124 These include PFI: Meeting the Investment Challenge, July 2003; Study into Rates of Return Bid on PFI Projects, October 2002; Review of Large Public Procurement in the UK, July 2002; The Green Book: Appraisals and Evaluation in Central Government, 2003; Public Private Partnerships: The Government's Approach, 2000; and Building Better Partnerships Report, IPPR 2001; PFI: strengthening long term partnerships, 2006 and Report on Operational PFI Projects by Partnerships UK, 2006
125 Overseas hearings; also advised in Australia by Mr G Campbell, Partner, Maddocks, transcript of evidence, p.15; Mr G Joyce, Graeme Joyce Pty Ltd, transcript of evidence, p.28; Ms C Hilder, Director, Policy, Australian Council for Infrastructure Development, transcript of evidence, p.42
126 Overseas hearings; also advised in Australia by Professor J Quiggin, Australian Research Council, Senior Fellow, School of Economics, Australian National University, transcript of evidence, p.210
127 Overseas hearings; Mr J Stewart, Chief Executive Partnerships UK, also advised in Australia by Mr G Joyce, Graeme Joyce Pty Ltd, transcript of evidence, p.24
128 Overseas hearings, Mr J Stewart, Chief Executive, Partnerships UK; Mr O Robbins, Head, Corporate and Private Finance Team, HM Treasury
129 Overseas hearings, officials from HM Treasury; Mr J Stewart, Chief Executive Partnerships UK
130 Overseas hearings, Mr S Harris, Head, International Financial Services, PPP Export Group; and Ms L Grist, the PPP Forum
131 Overseas hearings; also advised in Australia by Ms C Hilder, Director, Policy, Australian Council for Infrastructure Development, transcript of evidence, pp.41-42
132 Overseas hearings, Mr I Wootton, Partner, Infrastructure, Government and Utilities, PricewaterhouseCoopers
133 Overseas hearings, Mr P Maltby, Research Fellow, Public Private Partnerships, Institute for Public Policy Research and Professor A Pollock, Chair of Health Policy and Health Services Research Unit, University College of London
134 Overseas hearings, for example Mr P Maltby, Research Fellow, Public Private Partnerships, Institute for Public Policy Research
135 Overseas hearings, Mr J Stewart, Chief Executive Partnerships UK; Mr O Robbins, Head, Corporate and Private Finance Team, HM Treasury
136 Overseas hearings, representatives from Partnerships UK
137 Overseas hearings, representatives from the National Audit Office
138 Overseas hearings, Mr P Maltby, Research Fellow, Public Private Partnerships, Institute for Public Policy Research; also advised in Australia by Ms G Grace, General Secretary, Queensland Council of Unions, transcript of evidence, p.98
139 Overseas hearings, Mr J Stewart, Chief Executive Partnerships UK; Mr O Robbins, Head, Corporate and Private Finance Team, HM Treasury
140 ibid.
141 Overseas hearings, officials from HM Treasury
142 Overseas hearings, Mr J Stewart, Chief Executive Partnerships UK; Mr O Robbins, Head of Corporate and Private Finance Team, HM Treasury
143 Overseas hearings, Mr P Maltby, Research Fellow, Public Private Partnerships, Institute for Public Policy Research; Professor A Pollock, Chair of Health Policy and Health Services Research Unit, University College of London
144 Mr P Davies, PricewaterhouseCoopers, London
145 Overseas hearings, Mr M Lipson, Public Private Partnership Program (Local Government), Mr P Maltby, Research Fellow, Public Private Partnerships, Institute for Public Policy Research
146 Mr R Walker, Assistant Auditor-General, Victorian Auditor-General's Office, transcript of evidence, p.16
147 Mr M D'Elia, Director, Project Finance, PricewaterhouseCoopers, transcript of evidence, p.76
148 Dr C Duffield, An Evaluation Framework for Privately Funded Infrastructure in Australia, PhD thesis, The University of Melbourne, 2001, p.56
149 Overseas hearings, for example Mr J Person, Comptroller General, Office of the Comptroller and Auditor-General, Republic of Ireland