Private Finance Initiative - Treasury Contents

Written evidence submitted by The International Project Finance Association


1.1  The International Project Finance Association (IPFA) is delighted, on behalf of its members, to prepare and deliver this submission to the Treasury Committee of The House of Commons in response to the call for evidence in preparation for an inquiry on the "Private Finance Initiative".

1.2  IPFA was established in London in 1998 as a not-for-profit trade organisation and operates as a company limited by guarantee. IPFA is the only international and independent association dedicated to promoting and representing the interests of private sector companies involved in project finance and Public Private Partnerships (PPPs) throughout the world.

1.3  IPFA currently has in excess of 360 members, comprising companies and organisations drawn from the full range of the project finance industry, including project sponsors, contractors, lawyers, financial advisors, banks, consultants, accountants, insurers and equity investors. IPFA also provides public sector members the opportunity to become honorary or observer members. A large number of multilateral organisations and government agencies also regularly attend IPFA meetings across the globe.

1.4  We welcome that the Treasury Committee is calling for evidence on the future of the Private Finance Initiative (PFI).

1.5  IPFA believes that PPPs/PFIs have played an important role in the delivery of major infrastructure projects in the United Kingdom over the past fifteen years and can continue to do so.


2.1  The Government's recently published plans for some £200 billion to be invested in the UK economic infrastructure over the next five years is welcomed.1 Of the £200 billion, around 70% of this will be sourced through private sector investment, c £140 billion.

2.2  Both the HM Treasury report, "PFI: Strengthening Long Term Partnerships" and the recent National Infrastructure Plan 2010 recognises that UK's public services were suffering from a legacy of under-investment, particularly when compared to other G7 countries between 1970s and 1990s.

2.3  PFI/PPP projects have delivered a wide range of public services/assets addressing infrastructure need, coupled with providing increasing standards of service delivery and quality against value for money requirements. There are now over 700 PFI/PPP projects currently in operation in the United Kingdom.2 However, projects involving PFI/PPP techniques represent only a small number of the procurement routes for the public sector to adopt to deliver and manage public services. At present, it is estimated that PFI accounts for only around 10 to 15% of the total investment in public services.3

2.4  IPFA welcomes recent Government support for PFI/PPPs as playing an important role in delivering infrastructure.4 Our members consider that political will is a vital component to achieving delivery of successful infrastructure projects.

2.5  Our members do however acknowledge that recent press reports have highlighted criticism of the current PFI/PPP model as burdensome on public resources, inflexible and expensive.

2.6  The IPFA and its members welcome the opportunity to put forward evidence to the Treasury Committee in order to contribute to a balanced debate on the future role of PFI/PPP in delivering long-term infrastructure within the UK. In the current climate of fiscal constraint, the role and appropriate deployment of long-term third party private capital to delivering UK's long-term infrastructure ambitions has never been so vital.

2.7  It is also important to recognise the role that is being played by the UK PFI/PPP industry and the huge opportunities open to UK contractors and advisers in the implementation of overseas PPP bringing real benefits to the wider UK economy—with over 100 countries currently looking to implement PFI/PPP procurement techniques (with over 40 nations already having some form of PPP unit to oversee implementation of PPP policy/procurement).

2.8  In a manner consistent with the Government's approach to furthering UK competitiveness and the promotion of UK economic growth through exports, many UK based PFI/PPP contractors and advisory firms are taking the opportunity to exploit their PPP expertise and expand their services overseas employing staff not only in the UK but overseas. UK contractors and advisors face strong competition from overseas contractors and advisory firms. The UK's unrivalled experience in PFI/PPP does, however, provide firms with a competitive advantage in terms of the depth and breadth of experience.

2.9  A number of our UK based members have indicated that a number of jurisdictions have been picking up on the recent criticisms of the UK PFI/PPP model within the mainstream press, making the task of promoting UK PFI/PPP contracting and advisory expertise more difficult overseas.

2.10  The IPFA is committed to contribute to a balanced debate on the future of PFI and assisting in facilitating opportunities for both the private sector and the public sector (including sources of private sector capital) to work together to develop and improve upon the current PFI procurement models to enable PFI to continue to be considered as a key procurement model for the delivery of world class long-term infrastructure in the UK.


The IPFA responds to the call for evidence to each of the six questions below:

Question 1: What are the strengths and weaknesses of the different public procurement methods?

Q1.1  IPFA recognises that the use of "Private Finance" (ie PFI/PPP) is only one part of the overall toolkit of procurement options open to UK Government. At present, it is estimated that PFI based procurements accounts for only around 10 to 15% of the total investment in public services.5

Q1.2  For the purposes of responding to Question 1, we have concentrated our responses to the comparison between PFI/PPP based procurements to those using conventional style public procurement (ie design and build contracts, with separate maintenance arrangements).

Q1.3  It is worth noting that there is a lack of information/data on the performance of conventionally procured infrastructure;6 in particular, there has been little, if any, data collected on outcomes of traditional procurement. However, in the case of PFI/PPP there have been numerous reports and studies commissioned/written by HM Treasury and the NAO highlighting the benefits of PFI/PPP projects over traditionally procured projects,7 along with independent studies on their wider benefits.8 We recommend that further work is commissioned to assess the outcomes of traditional procured projects, so the comparison can be assessed in a balanced manner.

Q1.4  The key strengths attributed to a PFI/PPP based procurement method over a conventional style public procurement, are as follows:

—  Ability to transfer risk—The often cited benefits of PFI/PPP Projects over a conventional procurement relate to the key risks transferred to the private sector, in particular, (i) construction risk; and (ii) completion risk to time and cost. There is an overwhelming amount of evidence to substantiate that PFI/PPP projects are being delivered on time and on budget (see below).

—  Cost & Time Certainty (cf. public procured projects)—Certainty of both cost and time project delivery is a key strength. The Mott MacDonald Report (below) and various NAO Reports9 (including "Modernising Construction"10) noted significant deficiencies in the traditional procurement methodology. The Mott MacDonald Report, "Review of Large Public Procurement in the UK" published in July 2002 examined 50 projects procured traditionally over a 20 year period (each with a capital value in excess of £40 million in 2001 prices), all of the projects had been delivered late and over budget. The 2003 NAO Report on PFI Construction Performance11 found that only 22% of PFI procured projects had exceeded the cost expected by the public sector on contract award, most of these cost overruns being due to variations demanded by public sector sponsors. In contrast, the NAO noted previous surveys show that over 70% of buildings delivered to the public sector procured conventionally were over budget. Further, the 2003 NAO Report found that under PFI only 24% of public building projects had been delivered late, in contrast to data on traditional procurement which found that 70% of building projects had been delivered late.

—  Quality, maintenance of assets and focus on whole life costs—A key feature of PFI/PPP projects is that the whole-life cost of the project is assessed, including long-term maintenance. A number of our members have indicated that this rigour ensures that tangible benefits can be achieved through design and asset quality, incentivised through the long-term nature of the contracted payments made possible by the involvement of private sector capital. This perspective also encourages a focus on service delivery and long-term performance. For example, repairs and maintenance requirements are planned at the outset with allocated long-term budgets and consequently assets and services are maintained at a predetermined level over the life of the project.

—  Long-term partnership—Where PFI/PPP is suitable and is deployed, it can provide an enduring partnership between the public and private sector, providing rigour and long-term asset stewardship. A number of our members suggested the growth in the use of long-term capital from pension funds, insurers and long-term infrastructure funds will enhance and align interests between the public and private sector shifting the focus from short-term financial returns to long-term asset management and service delivery.

—  Performance—There is little monitoring of the performance of traditional public sector procurement projects, particularly over the asset life. In contrast, there is extensive monitoring of the private sector's performance during both construction and the operational phase of a PFI/PPP project. Most PFI/PPP projects include a performance and payment mechanism to ensure the private sector is incentivised to perform to a required standard throughout the concession period (which may be 30 years or more). Extensive monitoring and information provision obligations are included in such contracts, both as requirements of debt funders and procuring authorities. The Attachment to this Submission provides a powerful illustration of the payment profiles of conventional versus PFI/PPP contracts.

Q1.5  We also recognise that PFI/PPP based procurement methods are not without its critics. Indeed, as the Treasury Committee's own website states, "...[c]ritics argue that many PFI projects are inflexible and expensive, or worse, that the PFI is inherently wasteful of public resources..."

Q1.6  Against this, the potential weaknesses to the PFI/PPP based procurement method can be cited as follows:

—  Inflexibility—Inflexibility is often cited as a major flaw with PFI/PPP procurements. However, the evidence suggests the contrary, namely that PFI/PPP contracts provide sufficient flexibility for the public sector end-users12 and sponsors. PFI/PPP projects that are well-scoped in terms of design and the scope of services from initial procurement stages are less likely to require in-built, often expensive flexibility.

—  The National Audit Office (NAO) Report on "Making Changes in Operational PFI Projects" highlighted that PFI deals provided sufficient flexibility, ensured changes were handled in a timely manner, change processes were handled well and PFI changes achieved better value for money than conventionally outsourced work. The PFI/PPP contractual model forces public sector procurement teams to carefully assess their operational needs prior to embarking on procurement of a long-term PFI/PPP contract - based upon a "whole life" cost appraisal. This represents, a significant change in the behaviour by procurement officials, one of the early objectives of PFI.

—  Notwithstanding this, where there is a need for a change (whether policy, fiscal or operationally driven), there is in reality little difference between a PFI/PPP contract and a project procured through a traditional method. For changes within a PFI/PPP contract, the parties will have already negotiated and agreed a change procedure for the parameters, implementation and adoption of change/variations. There is no equivalent "change" regime within conventional procurement.

—  Expensive—A recurring theme is that PFI/PPP projects are too expensive. This has been linked in part to post credit crisis movements in senior debt pricing. Our members have reiterated that there is a more important seldom understood linkage between the amount of risk transferred to the private sector and the overall cost of the PFI/PPP project. The causal link and analysis between risk transfer and price needs to be better assessed and understood by the public sector. The over specification of PFI/PPP projects impacts affordability. The initial cost of procuring a building through conventional procurement cannot be easily compared to the whole life cost of a well maintained PFI/PPP asset over 30 years.

—  Complex and Lengthy Procurement Timetables—PFI/PPP are often cited as taking too long to procure. This is not entirely the fault of PFI/PPP, but the procurement processes themselves. We welcome the recommendations contained in the recent review of the competitive dialogue procedure undertaken by HMT13 to address this weakness. Our members have suggested procurement timetables and PFI/PP could also be improved through a combination of: (i) greater use of public sector initial design work, avoiding three separate bidders incurring significant upfront design costs; (ii) adoption of a more centralised procurement agency-led approach, similar to successful agencies in the Canadian provinces (Infrastructure Ontario/Partnerships BC), to avoid over fragmentation/inconsistency of public sector procurement expertise; (iii) greater use of input specification where the public authority is clear on its requirements; and (iv) avoidance of over specification, as setting lower service standards/handback requirements may not impact materially on service provision.

Question 2: 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?

Q2.1  Our members believe that the key driver for the use of PFI/PPP should be the definition and demonstration of affordable "value for money", rather than whether or not a particular project is included within the public sector balance sheet. Our private sector members are largely unaffected by the ultimate balance sheet treatment of a particular project.

Q2.2  The harmonisation of statistical reporting and budget treatment for public sector accounts amongst EU Member States is becoming increasingly important to our members, particularly for those who transact across the European Union and where the United Kingdom could be seen to be disadvantaged, if other Member States were working under a different system to the UK. This also improves both transparency and comparability of government debt across the EU.

Q2.3  Ultimately, however, our members do not believe the public sector balance sheet treatment of a project should be the determining factor as to whether a PFI/PPP solution should be adopted.

Question 3: How far can risk really be transferred from public to the private sector?

Q3.1  On risk transfer, many of our members recalled the often quoted, "…risk should be borne by the party most able to price and manage the risk…".

Q3.2  Whilst the extent of risk transfer between the public and private sector differs from project to project, there are a few key parameters.

Q3.3  In broad terms, risks that are capable of being priced, managed and controllable (and in some instances insurable) by the private sector are suitable to be transferred on an affordable value for money basis.

Q3.4  There has been a track record of significant risk transfer to the private sector with PFI/PPP projects. However, there has been little, if any, work undertaken on risk identification and analysis in traditional procurement, as the public sector retains most, if not all, of the major risks associated with a traditional procurement.

Q3.5  As PFI/PPP models evolve, our members have indicated that the public sector has sought to push the boundaries of risk transfer, seeking to transfer risks that have previously been retained by the public sector. This approach has two consequences. First, the transfer of risk is accompanied by an increase in price to reflect the risk transferred. Second, the timetable to procure the project is extended to enable the private sector and their funders to assess the new risk to be transferred. Once this new risk has been transferred across a number of projects the market can adapt, but the private sector needs time to adapt, assess and price any new risks being transferred - this can impact both price and the extend the procurement timetable.

Q3.6  A number of our members have pointed out that this risk transfer is not illusory. There have been a limited number of high profile events at both a corporate (ie Jarvis, Ballast) and project level (ie Royal Armouries Museum in Leeds, Defence Animal Centre PPP, Cornwall Schools, the National Physical Laboratory at Teddington and Croydon Tramlink) in the PFI industry where the private sector finance has been used to absorb significant risks and financial exposure to save the projects from performance failure. It is questionable whether this would have happened in a conventional procurement.

Question 4: Are there any particular kinds of risk which are particularly appropriate for transfer through PFI deals or particular projects suited for PFI?

Q4.1  Construction risk has been very successfully transferred to the private sector, with a number of PFI/PPP projects that have been delivered late, where the private sector has absorbed the financial consequences of late delivery, technical failure and cost overruns. In all such cases the costs and related losses would have been borne by the public sector in traditional procurements.

Q4.2  Our members indicated there are some risks that are difficult from a value for money or bankability perspective to pass to the private sector within a PFI/PPP contract; for example, (i) IT/ICT and related technology risks; (ii) complex interface issues (ie many arose in the London Underground Contracts); (iv) property value risks; (v) services requiring material and frequent changes; and (vi) risks associated with assets that are likely to require frequent changes; (vii) volume/demand risk; and (viii) protracted construction periods (ie HS2) where support may be needed from Government to optimise risk transfer.

Question 5: What state guarantees are explicit or implicit in PFI deals?

Q5.1  The vast majority of PFI/PPP deals are contracted by public sector bodies whose payment and performance obligations are underwritten, usually by statute or contractual covenant, by UK Central Government.

Q5.2  It has been critical, in terms of credit analysis and bankability of projects, that the payment obligations (in particular obligations to pay unitary payments or compensation on termination) are viewed and can be analysed as ultimately deriving from UK Central Government whether through statute or direct contractual covenants in the relevant project contracts.

Q5.3  There have been exceptions to this approach, in the case of NHS Foundation Trusts, there is no such underpinning or support from Central Government captured in statute or covenant. In order to achieve a bankable PFI/PPP project opposite an NHS Foundation Trust counterparty, the Secretary of State for Health has provided a deed of safeguard on a project-by-project basis which provides comfort to the private sector sponsor and its funders that in the case of failure of the NHS Foundation Trust, the Secretary of State for Health will effectively step-in. The importance of a deed of safeguard to the bankability of a 20-30 year PFI/PPP deal cannot be underestimated, without this, it is unlikely senior debt beyond 5-7 years would be available.

Q5.4  Even where bankability and a credit analysis can be traced to a Central Government's covenant to pay through statute or contract, it is important to note that there has been no underwriting of performance. In circumstances where a private sector contractor has failed to perform, there are mechanisms to deduct payments or on termination, retender the project, which places both the sponsor's equity and senior funders' debt at risk.

Question 6: In what circumstances are PFI deals suitable for delivery of services?

Q6.1  PFI/PPP projects have delivered a huge range of assets and services to the public sector. Services are generally categorised as "hard" and "soft" services, with "hard" services being linked to the maintenance of the fabric of the building or asset. In contrast, "soft" services those non-core services which are usually ancillary to the core government services (ie delivering clinical services or teaching) such as catering, cleaning etc.

Q6.2  In circumstances where the private sector are delivering new build assets within a PFI/PPP project there are strong arguments for including the provision of "hard" services within the project scope. Where the private sector have been responsible for design and building the asset, it is likely to be best placed to ensure the fabric of the building or asset is maintained through their understanding of the building design, materials, supply chain, lifecycle assumptions and access to warranties etc.

Q6.3  The case for the inclusion of "soft" non-core services is not so clear for long-term PFI/PPP projects and where these "soft" services are included many are subject to regular market assessment through benchmarking and market testing to ensure value for money is maintained during the life of the project concession and to mitigate potential changes in service requirements.

Q6.4  The case for inclusion of core services appears even weaker within a PFI/PPP project and where Government is minded to involve the private sector in the delivery of core or front line services, this may be better undertaken through an outsourcing model, which is better equipped to manage significant policy or operational changes.

Q6.5  Ultimately, the inclusion of any services with PFI/PPP is likely to succeed in circumstances where the public sector's service requirements are well scoped, required for a long period of time and are unlikely to materially change over the project term (or market test period).

Whilst we have sought and received feedback from a large number of our members, this submission does not necessarily represent the views of all of the IPFA's membership.

April 2011



(Source—PWC—Delivering the PPP Promise—A review of PPP issues and activity, 2005 )


1  HM Treasury/Infrastructure UK—"National Infrastructure Plan 2010"
(see )

2  Partnerships UK, Projects Database

3  See endnote 6, below.

4  HM Treasury, Public Private Partnerships—Technical Update 2010 (see

5  See endnote 6, below.

6  Refer to, paragraph 2.25 of "PFI: Strengthening long-term partnerships", HM Treasury, March 2006
Please also refer to HM Treasury, "PFI: Meeting the Investment Challenge", published July 2003
( and
"Infrastructure Procurement: delivering long-term value", HM Treasury, March 2008

7  Since 1997, the NAO have published over 60 reports of investigations into PFI and PPP deals. Please refer to the National Audit Office (NAO) website site, section on "Private Finance"

8  However, please refer to "PFI in school building—does it influence educational outcomes?" KPMG's Infrastructure Spotlight Report, 2009 Edition

9  Please refer to the NAO Report on "PFI: Construction Performance", published 5 February 2003

10  Please refer to the NAO Report on "Modernising Construction" published 11 January 2001

11  NAO Report on "PFI: Construction Performance", published 5 February 2003

12  NAO Report on "Making Changes in Operational PFI Projects", published 17 January 2008

13  See "HM Treasury Review of Competitive Dialogue", November 2010

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Prepared 10 August 2011