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Last edited 11 Jul 2016
Private Finance Initiatives (PFI) are the most common form of Public Private Partnerships (PPP), one of the three procurement routes preferred by the Government Construction Strategy for central civil government projects. Generally PFI is only suitable for large-scale projects 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, build and operate a development 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.
PFI projects give the public sector access to private sector project management skills and funding whilst allowing financing not to appear in government debt. As a single supplier is responsible for the delivery and operation of the project, it should also ensure better consideration of whole-life costs.
However, in practice, PFI is seen to be inflexible, offering poor value, with inequitable sharing of risk and profits. A damning 2011 House of Commons Treasury Select Committee report 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…'
The new version of PFI is referred to as PF2, and the key changes are set out below:
- The government will look to become a minority equity investor (probably around 30%) in PF2 projects, to ensure better alignment of objectives and greater transparency. To avoid potential conflicts of interest, this investment will be managed by a unit in the Treasury, separate from the procuring authority.
- The amount of private sector equity relative to debt will be increased from 90/10 to 80/20 or 75/25.
- PF2 Bidders will be required to develop a long-term financing solution that may include public and private bonds, commercial bank debt and multilateral debt products, but bank debt should not provide the majority of the financing.
- Funding competitions will be introduced for a proportion of the private sector equity.
- A control total will be introduced into government accounts for off-balance sheet PF2 contracts.
- An open-book approach will be introduced, with a gain share mechanism for surplus lifecycle funds.
- Actual and forecast equity return information will be required for publication.
- Some centralisation of procurement will be introduced, and there will be additional Treasury checks as part of the business case approval process.
- The tender process will be standardised, and the time taken from tender to appointment should take no more than 18 months. Bidders may be reimburses their bidding costs if projects are cancelled for exceeding the 18-month deadline.
- A suite of standard documentation will be created, including:
- Procurement and contract guidance.
- A shareholders' agreement.
- A facilities management service output specification.
- A payment mechanism for accommodation projects.
- Contracts will no longer include 'soft' services, such as cleaning, catering and perhaps some aspects of maintenance.
- The government will retain certain risks, and take a more appropriate share of others (such as insurances and the risk of changes to the law).
Broadly, these changes to PFI have been welcomed. The standardisation of procurement, and the shortening of the tender period are seen as positive, cost-cutting changes, and it is generally accepted that it is sensible to remove some long-term soft services from PFI contracts. However, there are concerns that changes to the financing of projects may in fact increase costs, in particular, changes to the debt to equity ratio, and the need for bidders to factor in an element of government equity.
PF2 will be piloted on the £1.75bn Priority Schools Building Programme (PSBP) as well as some defence projects and a new hospital project.
For step by step guidance on public projects, see: Public project: outline work plan.
 Related articles on Designing Buildings Wiki
- Crown build.
- Government Construction Strategy.
- House of Commons, Treasury - Seventeenth Report: Private Finance Initiative.
- Major Projects Authority.
- Private developer scheme.
- Private Finance Initiative
- Public Private Partnership.
- Public procurement.
 External references
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