1.3 Under a typical PFI deal, the public sector enters into a long-term contractual arrangement with private sector companies, which undertake to design, build, operate (and often maintain) an asset. There are around 700 PFI contracts in the United Kingdom. Over 500 of these are in England with a combined capital value of almost £50 billion. The forecast PFI payment for these projects for 2010-11 is estimated at £8 billion. They are usually long-term arrangements typically spanning 25 to 30 years. HM Treasury (the Treasury) estimates that the total commitments on current PFI contracts for the next 25 years for the United Kingdom are approximately £200 billion.16, 17
1.4 Since the mid-1990s, the majority of assets procured using PFI were commissioned by local authorities or arm's length bodies within nationwide programmes of similar assets. Procurement often involves more than one public sector body.
Figure 1 |
PFI contracts can deliver benefits but are inherently complex
Potential benefits include: The delivery of an asset which might be difficult to finance conventionally. Potential to do things that would be difficult using conventional routes. For example, encouraging the development of a new private sector industry. Encouraging the allocation of risks to those most able to manage them, achieving overall cost efficiencies and greater certainty of success. Delivery to time and price. The private sector is not paid until the asset has been delivered which encourages timely delivery. PFI construction contracts are fixed price contracts with financial consequences for contractors if delivered late. The banks providing finance conduct checking procedures, known as due diligence, before the contract is signed. This reduces the risk of problems post-contract. Encouraging ongoing maintenance by constructing assets with more efficient and transparent whole-life costs. Many conventionally funded projects fail to consider whole-life costs. Encouraging innovation and good design through the use of output specifications in design and construction, and increased productivity and quality in delivery. Incentivising performance by specifying service levels and applying penalties to contractors if they fail to deliver. Fewer contractual errors through use of standardised contracts. | Potential disadvantages include: The prospect of delivering the asset using private finance may discourage a challenging approach to evaluating whether this route is value for money. Reduced contract flexibility - the bank loans used to finance construction require a long pay back period. This results in long service contracts which may be difficult to change. The public sector pays for the risk transfer inherent in private finance contracts but ultimate risk lies with the public sector. Private finance is inherently complicated which can add to timescales and reliance on advisers. High termination costs reflecting long service contracts. Increased commercial risks due to long contract period and the high monetary values of contracts. Increased cost of finance since the credit crisis. |
Source: National Audit Office |
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16 See http://www.hm-treasury.gov.uk/d/pfi_signed_projects_list.xls
17 The Treasury estimates that the present value of the total commitments on signed PFI contracts is £121.4 billion.