1.5 In general, HM Treasury discourages public bodies from borrowing privately, as the government can raise finance at a lower cost than the private sector. However, it makes an exception for PFI owing to the potential of PFI to provide efficiency gains in the delivery of a project.4 HM Treasury considers that the risk transfer to the private sector can result in benefits which can outweigh the higher financing costs. The potential for efficiencies and improved outcomes for the public sector under PFI include:
• Certainty over construction costs
There is a strong incentive for the private sector to build assets to budget as it bears the risk of construction cost overruns.
• Improved operational efficiency
As the SPV is responsible for operating the asset it has an incentive to consider how it can reduce long-term running costs at the outset.
• Higher quality and well-maintained assets
PFI requires assets to be well maintained during the contract period. This could provide benefits for users of these assets and also lead to longer asset lives.
Some of the evidence on these benefits, and whether they could or have been replicated with other forms of procurement, is discussed below.
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4 HM Treasury, Managing Public Money, July 2013 (revised August 2015), paragraph 5.9.1.