19. The essence of PFI deals is that the private sector contractor should take appropriate risks in return for appropriate rewards. If contractors fail to manage the risks they have taken on, they should expect that part or all of their equity investment in the project may be lost, just as they expect to be rewarded when things go well. In a number of individual cases, however, contractors have in effect been bailed out by the taxpayer. Even a small number of such cases can have a disproportionate affect on an essential commercial discipline, giving the impression that departments are likely to bail out PFI contractors whenever they get into trouble.
20. Departments should ensure that equity risk in PFI deals is real. If a project involves a high degree of commercial risk, it needs to be financed with a commensurately high level of risk capital relative to bank debt. It is a false economy for a department to acquiesce in an over-geared financial structure for a PFI deal.
21. The transfer of risk inherent in a PFI deal cannot protect the authority from the risk that the private sector simply fails to deliver what may be a key public service. The remedies available cannot fully compensate for the disruption and operational risks that would inevitably follow. It is essential that departments should fully understand these and other risks that have not been transferred and ensure that they are actively managed.
22. When projects go wrong, management should face up to the prospect of failure and take prompt action to avoid abortive costs. A reluctance to take decisive action is likely to make a difficult situation much worse and lead to costs mounting ever higher.
23. In several deals we have examined that have gone wrong, contingency plans have proved to be inadequate. As with all their major programmes, departments should have up to date contingency plans ready on all major contracts so that there is a fall-back position if and when a project gets into difficulties.
24. Termination of PFI contracts has been a very rare event despite the number of deals that have got into trouble. In several cases, departments have hesitated to use termination provisions in PFI contracts for fear of counter-claims by the contractors. Departments need to make contractors aware that termination is a very real threat. They should not always regard it as the most difficult and risky option.