|There can be greater price certainty. The department and contractor agree the annual unitary payment for the services to be provided. This should usually only change as a result of agreed circumstances.
||The department is tied into a long-term contract (often around 30 years). Business needs change over time so there is the risk that the contract may become unsuitable for these changing needs during the contract life.
|Responsibility for assets is transferred to the contractor. The department is not involved in providing services which may not be part of its core business.
||Variations may be needed as the department's business needs change. Management of these may require re-negotiation of contract terms and prices.
|PFI brings the scope for innovation in service delivery. The contractor has incentives to introduce innovative ways to meet the department's needs.
||There could be disbenefits, for example, if innovative methods of service delivery lead to a decrease in the level or quality of service.
|Often, the unitary payment will not start until, for example, the building is operational, so the contractor has incentives to encourage timely delivery of quality service.
||The unitary payment will include charges for the contractor's acceptance of risks, such as construction and service delivery risks, which may not materialise.
|The contract provides greater incentives to manage risks over the life of the contract than under traditional procurement. A reduced level or quality of service would lead to compensation paid to the department.
||There is the possibility that the contractor may not manage transferred risks well. Or departments may believe they have transferred core business risks, which ultimately remain with them.
|A long-term PFI contract encourages the contractor and the department to consider costs over the whole life of the contract, rather than considering the construction and operational periods separately. This can lead to efficiencies through synergies between design and construction and its later operation and maintenance. The contractor takes the risk of getting the design and construction wrong.
||The whole life costs will be paid through the unitary payment, which will be based on the contractor arranging financing at commercial rates which tend to be higher than government borrowing rates.
3. Before embarking on the PFI route, departments need to consider
the available options for financing their projects. As well as
the PFI, the options may include other types of partnership arrangements
with the private sector and various forms of conventional finance.
The assessment should include a realistic and comprehensive analysis
of costs, benefits and risks. Such appraisals are not always being
done adequately, however, with the PFI option too often being
seen as the favoured route before a proper assessment has been
4. The question also arises as to whether the benefits of the
PFI approachparticularly the use of private sector skills
and the more appropriate allocation of riskare sufficient
to justify the extra cost of using private finance. One of the
valuable features of private sector financing of PFI projects
is the extensive due diligence that private sector risk-takers
carry out. But the returns to financiers need to be commensurate
with the risks that they are actually taking and this in turn
depends on the market being well informed and truly competitive.
External financing of PFI projects could be good value if the
extra costs are justified by the risks transferred and if due
diligence serves to manage those risks more effectively. But it
is also possible that these benefits could be obtained more cheaply
through alternative forms of financing. A thorough evaluation
of the advantages and disadvantages of possible alternative financing
structures for PFI deals is needed.
|PFI deal||Committee's findings
|Dartford and Gravesham Hospital (12th Report, Session 1999-2000)
||The NHS Trust did not detect significant errors in the public sector comparator. The Trust also did not quantify the full effects of changes in contract terms and of the sensitivity of the deal to changes in key assumptions, as the deal went forward. Had the Trust known that the savings were marginal when negotiating the deal, it might have made different decisions and achieved better value for money.
|Airwave (64th Report, Session 2001-02)
||A public sector comparator was not prepared until late in the procurement, and after a decision to use the PFI had already been made. It is therefore doubtful that the use of a comparator added to the decision-making process.
|MOD Main Building (4th Report, Session 2002-03)
||The public sector comparator gave a central estimate for the cost of a conventionally financed alternative to the PFI deal as £746.2 million, compared to an expected deal cost of £746.1 million. Such accuracy in long term project costings is spurious, and the small margin in favour of the PFI deal provided no assurance that the deal would deliver value for money.
|West Middlesex Hospital (19th Report, Session 2002-03)
||The NHS Trust's advisers strove to make slight adjustments to the calculations, well within the range of error inherent in costing a 35 year project, so that the PFI cost appeared marginally cheaper than the public sector comparator.