Private Finance Initiative - Treasury Contents

Written evidence submitted by UK Contractors Group


1.  In this evidence UKCG argues that:

—  Continued infrastructure investment is essential to maintain the UK's international competitiveness and to stimulate growth and employment.

—  PFI has been one way of delivering that investment. It has significant strengths on which we should build. Even so, it could be delivered more cost effectively if government was clearer on its long term investment intentions and there was a more equitable sharing of risk between the public and private sectors.


2.  UKCG represents over 30 leading construction companies who together produce some £36 billion of construction turnover—some 30% of the construction industry's total output. UKCG members have played an active role in PFI as construction contractors, investors and asset managers. UKCG members have greatest experience on the construction of PFI assets and especially the procurement processes used. This evidence therefore largely focuses on these elements.


3.  The UK needs modern infrastructure to maintain its international competitiveness. The CBI has suggested that, to maintain the UK's existing infrastructure assets, the country needs to spend at least 2.25% of GDP on capital programmes. However, current fiscal constraints have reduced annual spending to around 1% of GDP and there is little immediate prospect of any increase. This risks our asset base deteriorating and a decline in international competitiveness. Use of private finance could help to bridge the growing shortfall in capital spending provided that it is affordable in the longer term.

4.  Moreover, construction investment stimulates both growth and employment. An independent report produced for UKCG by L.E.K. consulting showed that:

—  every £1 invested in construction generates £2.84 in total economic activity;

—  every £1 spent yields a return of 56p to the Exchequer—net investment is therefore 44p; and

—  92p in every £1 spent is retained in the UK.

5.  The report also demonstrated that investment in construction in the UK is the best way of stimulating employment. A full copy of this report is attached (Appendix 1) to this evidence.

6.  With economic growth remaining fragile and youth unemployment worryingly high, more construction investment would help to stimulate the economy and employment.

7.  PFI has been a means of delivering longer term investment programmes because it spans changes of government (nationally and locally) and allows investment to remain fairly constant throughout the economic cycle.

8.  The UK construction industry performs at its best when it has clear information about the forward line of infrastructure investment. Given adequate information about the output required (eg numbers of new houses, hospitals and roads) it can help develop the most cost effective solutions to deliver them. Such information provides investor confidence to allow the industry, for example, to purchase material in bulk, invest in off-site pre-fabrication and to exploit economies of scale.

9.  Currently information about public sector investment is patchy at best and recent political rhetoric about PFI has damaged investor confidence. This has been partially recognised by the government which has made a commitment to publish better information on forward investment from the Autumn of this year. It is required now as a matter or some urgency. In addition, the industry has yet to engage with government in a meaningful discussion about how we might produce alternative procurement models building on the strengths of PFI and overcoming its weaknesses.


10.  Almost without exception PFI funders and investors have required the construction to be procured via a design and build contract which provides certainty that the project will be delivered to time and to budget. That is one of its main strengths.

11.  A major criticism of PFI is that it is an expensive way of borrowing money. Without doubt government can borrow money more cheaply than the private sector because it is not pricing specific "risk". However, that means the risks are not always properly analysed leading to project costs escalating and to programme delays. Over 70% of non-PFI projects are delivered over budget and in all such instances the public sector has had to pay more. In contrast, less than 20% of PFI projects have been over budget and in most of these cases the cost has been borne by the contractor and not by the public sector.

12.  Other strengths of procurement via PFI include:

—  It manages "risk" much more effectively because of the extensive due diligence necessary to secure private investment - hence the majority of projects are delivered to time and budget.

—  It provides greater transparency on the "whole life costings" of projects, because of the obligation to maintain the facilities to pre-agreed stringent standards and hence clearer information on value for money.

—  It maintains the asset to pre-agreed standards. In contrast, buildings procured by other methods often quickly fall into disrepair due to the lack of an adequate maintenance budget.

—  PFI has transformed the way in which the public and private sector work together—relationships have moved from one of adversity to partnership and trust—also increasing certainty of outcomes.

—  Because the public entity is entering into a long-term commitment it has been encouraged to consider its long-term requirements, possible changes to how services are delivered and procure more flexible and adaptable buildings.

—  Generally, because the buildings are owned by the private sector partner, the authority avoids having to pay capital charges.[71]

—  Generally the asset is returned free of charge at the end of the concession (even LIFT[72] offers an option to acquire at below market prices).

13.  As operated in the UK, there are also a number of weaknesses with the PFI model. These are:


14.  There are various reasons for this:

—  In the early days of PFI (especially in the health sector) it was because the public sector could not decide quickly what it wanted and what it could afford. A survey carried out by the then Major Contractors Group in 2005 on 57 PFI projects showed that the average delay in projects against published schedules was 8 months and the costs associated with these delays were £1.21 million per project (some 1.6% of project values).

—  More recently, when not applied appropriately the EU Competitive Dialogue Procedure has led to delays in the procurement process and consequently increased costs. This was recognised in the findings of the HM Treasury Review of Competitive Dialogue published in November 2010.

—  In the recently aborted Building Schools for the Future Programme the client required too many fully worked up bespoke designs the majority of which were wasted as contractors were eliminated from the competition. More upfront attention to design and some elements of standardisation would reduce procurement costs significantly.

15.  Even now the procurement process for a new hospital project in the UK can take over two years before any construction work is undertaken. For example, Papworth Hospital Procurement—OJEU in August 2010 and due to sign a contract in late 2012. However, in contrast, where PFI has been exported the procurement process has been shorter and slicker. For example the equivalent timeline for Bermuda's first PFI project was less than 18 months.


16.  PFI seeks to transfer the risks to the party best able to manage them (including retaining certain risk within the public sector). As the risks of PFI have become   better understood and better managed the costs of PFI should have consequently reduced. This has not been the case because, as PFI has evolved, the private sector has been asked to take on more and more risk—some of which is unnecessary—which has added to costs.

17.  Some examples of risks transferred to the private provider which may offer better value for money if retained by the Public Authority include:

—  Insurance, where under more traditional procurement government has a policy of self insurance.

—  ICT.

—  "Soft" services.

—  Anomalies in the Payment Mechanism.

—  All of the Unitary Payment at risk.

—  Security of electricity supply and related switchgear design, which could be standardised in a common specification.

—  Change of Law.

—  Interest rates.

—  Energy efficiency.

—  TUPE.

—  Pensions.

18.  A more sensible balance of risk between the public and private sector would reduce the cost of projects significantly.


19.  There are numerous examples of over specification by clients both for the initial building specification and the on-going operational service requirements. These include:

—  Construction.

—  Public art.

—  BREAMM specifications.

—  Services.

—  In many contracts there is evidence of inappropriate response times requiring resources and procedures that are unnecessarily expensive to achieve over-specified outcomes.

20.  In addition, contractors are asked to hand back buildings at the end of the concession period (normally 25 years) in pristine condition. The adoption of less stringent standards would also reduce costs significantly.


21.  As pressures increase on the public purse, there is growing public concern about the affordability of interest payments on the loans which, as in the case of mortgages on houses, will always be much more costly than buying the asset up front. There are opportunities to reduce these costs significantly by looking at other funding mechanisms. Two possibilities are:

—  a more vigorous approach to identifying and selling surplus public land to help offset costs; and

—  offsetting costs by charging users for the use of the asset (for example through toll charging on roads).


22.  All PFI contracts include provisions for the client to vary his requirements, including the right to terminate voluntarily. The process to define, price, finance and implement changes can be overly cumbersome due to the need to consider the immediate capital cost and the ongoing impact on maintenance, lifecycle, soft services, insurances etc, compounded by the necessary involvement of the funders and their due diligence process. It is worth noting that should there be a significant shift on how services are delivered or stopped being delivered this may result in redundant facilities however they were procured initially.

23.  Experience over the past decade has shown that it is not always sensible to lock all FM services into long term contracts spanning the life of the PFI projects. In some cases—especially recognising that the use of buildings will change over time—it would be more sensible to have much shorter time horizons which would deliver greater flexibility. This is likely to create better value for money in areas such as ICT and soft services.

24.  Turning to the other specific questions posed by the Select Committee, not answered above:

If PFI debt had been on-balance sheet rather than off-balance sheet would PFI projects have been used as much?How should PFI deals be accounted for?

25.  Most PFI assets are now on the Government's books under IFRS accounting. Even under the old accounting economists factored PFI obligations (and pension obligations) into the UK's total indebtedness. Some of the early deals are believed to have been driven by the off balance sheet factor, however the success of their risk transfer meant that PFI/PPP came to be recognised as an efficient model for some procurements.

26.  All new PFI contracts now appear on balance sheet. There is no doubt, however, that some of the early decisions to keep PFI off balance sheet have contributed to much of the bad press that it does not provide value for money. Increased transparency is therefore vital to maintain the long term credibility of the market. More transparent accounting also provides an evidence base to demonstrate the advantages of using PFI. Even so, to provide a clear comparison between PFI and other methods of procurement, the amount shown on the balance sheet should be confined to capital costs and not the ongoing service provision.

Are there particular kinds of risk which are particularly appropriate for transfer through PFI deals, or particular projects, which are suited for PFI?

27.  PFI has delivered numerous successful projects in both the economic and social infrastructure category, on time and within budget.

What state guarantees are explicit or implicit in PFI deals?

28.  Implicit in dealing with Government is the application of the highest standards of probity and governance. Explicit in the PFI contact is that if services are delivered to the contract requirements then payment is guaranteed. Failure to deliver to contract requirements will trigger deductions according to the terms of the contract, which can vary in detail considerably from one contract to another. The extent to which deductions can amount is typically capped. The willingness of the banks to lend is predicated on the basis of an implied Sovereign guarantee underwritten by the British Government. Deeds of Safeguard are issued when a public sector partner changes status, as in the NHS when Foundation status—giving a high degree of financial independence—is achieved. This protects the interests of the private sector partner.

In what circumstances are PFI deals suitable for delivery of services?

29.  PFI requires relative certainty, therefore is not appropriate in rapidly changing technological environments (IT) or where the scope of work required is impossible to determine until after the contracts have been signed (London Underground).In all circumstances when there is a sufficiency of money. The difficulty arises when there is insufficient to pay the PFI Unitary Charge and provide an acceptable level of services delivered by State Departments. When the public sector purse dries up the PFI contract demands that the PFI payments are paid irrespective of consequences, for example to staffing levels.

April 2011

71   Capital charges are the capital costs of a project together with depreciation. Back

72   LIFT is an NHS vehicle for improving primary and community care facilities. Back

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© Parliamentary copyright 2011
Prepared 10 August 2011