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Last edited 25 Jan 2019
Private Finance Initiatives (PFI) are a form of Public Private Partnerships (PPP), one of the 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 were welcomed. The standardisation of procurement, and the shortening of the tender period were seen as positive, cost-cutting changes, and it was generally accepted that it was sensible to remove some long-term soft services from PFI contracts. However, there were concerns that changes to the financing of projects could 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.
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...”
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.
 Find out more
 Related articles on Designing Buildings Wiki
- Complex project.
- 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.
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