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Potential generic benefits and  disbenefits  of PFI deals

The Figure shows some potential generic benefits and  disbenefits  of PFI contracts

Benefits

Disbenefits

There can be greater price certainty. The department and contractor agree the annual unitary payment for the services to be provided. This should usually only change as a result of agreed circumstances.

The department is tied into a long-term contract (often around 30 years). Business needs change over time so there is the risk that the contract may become unsuitable for these changing needs during the contract life.

Responsibility for assets is transferred to the contractor. The department is not involved in providing services which may not be part of its core business.

Variations may be needed as the department's business needs change. Management of these may require re-negotiation of contract terms and prices.

PFI brings the scope for innovation in service delivery. The contractor has incentives to introduce innovative ways to meet the department's needs. In the case of hospitals, however, this is limited since currently clinical services are excluded and remain with the NHS Trust.

There could be disbenefits, for example, if innovative methods of service delivery lead to a decrease in the level or quality of service.

Often, the unitary payment will not start until the building is operational, so the contractor has incentives to encourage timely delivery of quality service.

The unitary payment will include charges for the contractor's acceptance of risks, such as construction and service delivery risks, which may not materialise.

The contract provides greater incentives to manage risks over the life of the contract than under traditional procurement. A reduced level or quality of service would lead to compensation paid to the department.

There is the possibility that the contractor may not manage transferred risks well. Or departments may believe they have transferred core business risks, which ultimately remain with them.

A long-term PFI contract encourages the contractor and the department to consider costs over the whole life of the contract, rather than considering the construction and operational periods separately. This can lead to efficiencies through synergies between design and construction and its later operation and maintenance. The contractor takes the risk of getting the design and construction wrong.

The whole life costs will be paid through the unitary payment, which will be based on the contractor arranging financing at commercial rates which tend to be higher than government borrowing rates.

Source: National Audit Office