9 One of the key advantages of the PFI is that the potential for private sector innovation can be maximised through a single competitive process in which bidders submit proposals covering all of the elements that make up a typical bid, often described as design, build, finance and operate. The success of the Treasury funding competition, where the financing was arranged through a separate competition after the other elements of the deal had been agreed, has shown that additional value can be generated by procuring the project funding in this way. This suggests that funding competitions may have a role to play in future PFI deals.
10 While the synergies between the design, build and operate parts of a deal are clear, the advantages of arranging the financing at the same time may not be always so obvious. When a contractor is selected as the preferred bidder the commercial elements of a deal should have been agreed. The complete cost of financing, however, is usually only finalised at financial close for a project financed transaction. Financial institutions are likely to be more competitive if they are asked to bid for the financing after a contractor has become the preferred bidder and a commercially viable project agreement has been negotiated, allowing credit risks to be properly assessed and priced. The potential benefits of a funding competition are the likelihood that the most appropriate form of financing will be arranged at a competitive price.
11 There are, however, significant risks in running a funding competition. These risks include the project not attracting competitively priced funding and the deal taking longer than expected, leading to increased procurement costs and a delay in realising the project benefits.