Private finance initiative

1 Introduction
2 Contractual arrangements
3 Risk
4 PF2
5 Decline in use
6 Updates
7 Related articles on Designing Buildings Wiki
8 External references

[edit] Introduction

In 1992 Chancellor of the Exchequer Norman Lamont made an announcement relating to "ways to increase the scope for private financing of capital projects", this became the Private Finance Initiative (PFI).

Private Finance Initiatives are a form of Public Private Partnerships (PPP), one of the procurement routes preferred by the Government Construction Strategy for central civil government projects. Traditional procurement routes that separate design from construction are not preferred unless it can be demonstrated they offer better value for money.

On PFI projects, a single integrated supply team is appointed with design, construction and facilities management expertise to design and build a development and then to operate it for a period of time. A special purpose vehicle (SPV), of which the integrated supply team is a part, finances the project and leases it to the government for an agreed period (perhaps 30 years) after which the development reverts to government ownership.

As this is a very long-term relationship, entered into before any design work has been undertaken, it is extremely important that the client defines their requirements properly, in particular the quality that is required and how it will be judged.

This is done through the preparation of an output-based specification. This makes the output-based specification a crucial document upon which the successful design and the operation of the development will hinge. The client may need to appoint independent client advisers to help them with its preparation.

Generally, PFI is only suitable for large-scale projects with a capital cost of over £20 million, (ref. Achieving Excellence Guide 6 - Procurement and Contract Strategies P6) such as infrastructure projects, hospitals and schools.

[edit] Contractual arrangements

Private Finance Initiatives involve very complex contractual arrangements.

Within the integrated supply team there may be separate agreements for:

Funding (perhaps by a bank and others).
Design and construction.
Facilities management.

Each of these agreements may have multiple sub-contracts.

There will then be separate agreements between the client and the SPV (concession or project agreements).

Usually the design and construction contract (between the SPV and the contractor) will be a standard engineering, procurement and construction (EPC) contract, for a fixed price with a practical completion date and defects period. The SPV is likely therefore to need to appoint a contract administrator and there may also be an independent certifier who represents the funder.

[edit] Risk

Private Finance Initiative projects often require that the SPV takes on a great deal of risk. However, the price they offer will reflect any risks that they have been asked to bear. It may be uneconomic therefore to transfer some risks to the SPV, such as planning risk, insurances or risks that are beyond the control of the SPV, such as the risk of changes in legislation.

Planning risk is a serious and contentious issue, as the project will be tendered before designs have been prepared. The client should at least consult the local planning authority to establish the likely planning parameters for the project and perhaps seek a screening opinion as to whether an environmental impact assessment will be required before seeking bids.

The client may also wish to obtain outline planning permission before seeking bids, or even make the contract conditional upon detailed planning permission being received. The SPV may then be responsible for obtaining detailed planning permission or any further permissions. Failure to obtain detailed planning may result in termination of the contract giving rise to compensation events.

[edit] PF2

In practice, PFI is seen to be inflexible, offering poor value, with inequitable sharing of risk and profits.

The damning 2011 House of Commons Treasury Select Committee report on PFI found '...that PFI projects are significantly more expensive to fund over the life of a project' and that there is no '...clear evidence of savings and benefits in other areas of PFI projects which are sufficient to offset this significantly higher cost of finance'.

The government initiated a review of PFI in 2011, and on the 5th December 2012, published details of a new approach, stating that it '…remains committed to private sector involvement in delivering infrastructure and services, but has recognised the need to address the widespread concerns…'

Key changes include:

The government becoming a minority equity investor in PFI projects.
Increasing the amount of private sector equity relative to debt.
Increasing standardisation, centralisation and transparency.
Reducing the length of the tender process.
The government retaining or sharing more risk.
Excluding soft services such as cleaning.

PF2 was piloted on the £1.75bn Priority Schools Building Programme (PSBP) as well as some defence projects and a new hospital project.

See PF2 for more information.

[edit] Decline in use

Oral evidence given to the House of Commons Public Accounts Committee (PAC) on 28 May 2018 revealed that only 12 projects had been brought forward under PF2 in the past five and a half years and that the last PF2 scheme agreed by the government was in April 2016.

Charles Roxburgh, the second permanent secretary at the Treasury said; “We think there are some promising projects on the horizon – some good roads projects – but we are talking of a handful, rather than going back to the days of the 2000s, when it was up to one a week and £8bn a year… PF2 is used only if it gives us better value for money. That is a pretty high bar, particularly when there is an awful lot of other public investment going into infrastructure...”

(Ref. http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/public-accounts-committee/private-finance-initiatives/oral/81067.html)

[edit] Updates

[edit] January 2018

On 18 January 2018, the National Audit Office (NAO) reported that there were currently more than 700 operational PFI and PF2 deals, with a capital value of £60 billion and annual charges of £10.3 billion in 2016-17. Even if no new deals are entered into, future charges which continue until the 2040s amount to £199 billion.

In a critical report, it suggested that there was no information about whether PFI offered better value than other forms of contracting. The auditors reported that the cost of privately financing public projects can be 40% higher than relying exclusively on government money.

(Ref. https://www.nao.org.uk/report/pfi-and-pf2/)

[edit] October 2018

In the 2018 Autumn Budget, Chancellor Philip Hammond confirmed that the government would be scrapping both PFI and PF2 contracts, with no more being signed.

Addressing the House of Commons, Hammond said: "I'm committed to PPP where it delivers value to the taxpayer and shifts risk to the private sector. There is compelling evidence that PFI does neither." While the government will, he said, honour existing contracts, there "will be no pushover" in their management.

"I have never signed off a PFI contract as Chancellor…and I can confirm today that I never will. I can announce that the Government will abolish the use of PFI and PF2 for future projects."

Ref https://www.gov.uk/government/speeches/budget-2018-philip-hammonds-speech

[edit] 2019

On 13 March 2019, The government opened a consultation on how best to support private investment in infrastructure. The review will look at the government’s tools for supporting private investment, and how they are delivered, in the context of the UK’s changing relationship with the European Investment Bank. The consultation closes on 5 June 2019. Ref https://www.gov.uk/government/consultations/infrastructure-finance-review

Jason Millett, Mace's COO for its consultancy arm, said: "Given the demise of PFI, finding a new way to fund Britain's infrastructure is of the utmost importance. It's right that the private sector should contribute, but we need to be certain that whatever the new model is, it encourages sustainable, long term growth and doesn't undermine an industry that already faces serious challenges around margins and risk management." Ref http://www.constructionmanagermagazine.com/news/chancellor-launches-pfi-replacement-consultation/

For a detailed description of the sequence of the tasks undertaken on Private Finance Initiative (PFI) projects see the work: Public project: outline work plan.