Last edited 11 Jul 2016

Private finance initiative


[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 the most common form of Public Private Partnerships (PPP) (ref HM Treasury: Public private partnerships), one of the three procurement routes preferred by the Government Construction Strategy for central civil government projects (the other two being prime contracting (or prime-type contracting) and design and build). Traditional procurement routes that separate design from construction should not be used unless it can be demonstrated they offer better value for money.

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.

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.

[edit] Project definition

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.

[edit] Contractual arrangements

Private Finance Initiatives involve very complex contractual arrangements.

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

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 will be 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] Find out more

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.

[edit] Related articles on Designing Buildings Wiki

[edit] External references