Project management and the private finance initiative

The SPV is a limited company that is set up for the sole purpose
of delivering the PFI project. It comprises parties from the
winning consortium, which will typically include a construction
contractor, facility management provider, investors and other
specialist contractors. The objectives of the SPV are to minimise
the risks of delivering the project and to generate profits. In
doing so it will pass down risks to sub-contractors, thereby
limiting risk in the SPV. Limiting risk in the SPV is particularly
important because consortia usually require access to third party
funding, such as equity, bank loans or bonds. The objective of the
third party funders is to make a profit from their investment (Fox
and Tott, 1999).
Although many of the risks associated with PFI projects lie with
the SPV, the awarding authority still has a critical role to play in
managing the procurement process. Amongst other things, the
awarding authority is responsible for:
• Establishing the business case;
• Developing the public sector comparator 3 ;
• Devising the output specification;
• Inviting and evaluating bids; and
• Awarding and managing the contract (Treasury Taskforce, 1998).
In doing so the awarding authority may call on the expertise of
external consultants and advisors. This is particularly important
in projects where awarding authorities have little or no
experience of the PFI process.
As of April 2003, 569 PFI contracts had been signed, 418 of which
were already operational (OGC, 2003a). The combined capital
value of these contracts was £53 billion, although the value of
individual projects ranged from under £1 million to over £1
billion (OGC, 2003a). In the construction and property sector, the
scope of PFI has been wide-ranging, including roads, bridges,
sewage treatment plants, waste incinerators, hospitals, schools,
prisons and office accommodation.
Research for Foundation for the Built Environment (Dixon et al,
forthcoming) showed that in the early years of PFI (1992–1994)
only 8 deals were signed, with a combined value of £630 million.
PFI has grown in importance, however, with a peak in 2000,
when 102 PFI contracts worth £4.3 billion were awarded. The
research also showed that more than a third of PFI contracts
awarded since 1992 were in the education or health sectors,
comprising 19% of the total capital expenditure through PFI.
A large number of PFI contracts have been awarded by the
Ministry of Defence (MoD) and the Home Office (mainly prisons)
(Figure 2.2). Although fewer in number than health and
education projects, MoD and Home Office projects still comprise
17% of total PFI capital expenditure since 1992. The most
valuable PFI contracts have been awarded by the Department for
Transport, its 31 PFI projects comprising 39% of total capital
expenditure on PFI. In contrast, more than half of all other
departments have procured less than 10 PFI projects,
constituting just 12% of total PFI spending, and five of these
have procured only one project 4 .
Despite the large number of projects procured to date, however,
the effectiveness of PFI is still subject to considerable debate.
A number of studies have suggested that PFI has delivered
benefits over conventional public sector procurement (Arthur
Andersen / Enterprise LSE, 2000; Ive et al., 2000; NAO, 2003a).
For instance, a study of PFI projects by the National Audit Office
revealed that only 22% of projects experienced increasing
construction costs after the contract had been awarded (NAO,
2003a). Ive et al. (2000) found average total cost savings of
between 5% and 10% compared with conventionally procured
projects, and Arthur Anderson and Enterprise LSE (2000)
identified average cost savings of 17%.
Nevertheless, the use of PFI has not been without problems (Audit
Commission, 2003; NAO, 2003b; Ive et al., 2000). A survey of PFI
schools by the Audit Commission (2003) suggested that the quality
of PFI schools was lower than those that had been procured
conventionally. Similarly, a National Audit Office study of PFI
prisons concluded that the operational performance of projects,
as measured against the terms of contracts, had been mixed
(NAO, 2003b). PFI has also been criticised for its high transaction
costs, reflecting the complexity of the procurement process. For
example, legal and advisory fees have, on average, been 10% to
20% higher than under conventional procurement (Ive et al., 2000).
3 The public sector comparator (PSC) is the benchmark project against which the PFI option and private sector bids are evaluated (Treasury Taskforce, 1998).
4 There have also been a number of large PFI IT projects, which have produced mixed results. Recent high profile cases which have run into problems include new IT systems for the child
support agency and the criminal records bureau (Denny, 2003). The Government has decided to restrict PFI to large projects because in their view (HM Treasury, 2003), high legal and
financial costs make projects less than £20m poor value. A more detailed review and analysis of such projects is expected from the Treasury in autumn 2003.
Project management and the private finance initiative chapter two Managing the private finance initiative
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