Private Finance Initiative - Treasury Contents

Written evidence submitted by the Specialist Engineering Contractors' Group


1.  SEC Group represents the specialist engineering sector which accounts for up to 40% of the work done on many PFI projects and facilities. SEC Group is an umbrella body for six of the construction industry's premier trade associations.

Association of Plumbing and Heating Contractors

British Constructional Steelwork Association

Electrical Contractors' Association

Heating and Ventilating Contractors' Association

Lift and Escalator Industry Association

SELECT (Electrical Contractors' Association for Scotland).

Together these organisations act on behalf of a sector comprising over 60,000 firms and a workforce of more than 300,000. They account for the largest single component (by value) of construction output. Further information is available on the SEC Group website—


2.  The primary driver in the development of the PFI model for delivering public assets has been the transfer of risk from the public sector to the private sector. In practice much of the private sector risk has been transferred to the firms in the construction supply chain delivering the asset or facility. Many of these firms are unable to accommodate the risks passed down to them either because of size and/or levels of capitalisation. Inappropriate risk allocation does not deliver value for money.

3.  Construction contracts for PFI facilities are usually let using traditional procurement routes. Traditional construction procurement does not generally deliver modern facilities that are sustainable and efficient in respect of energy use and maintenance. Traditional construction procurement is characterised by the lack of any buy-in from the supply chain delivering the asset to decisions on design, risk and cost. Countless reports have advocated a solution to this which, in summary, requires that the asset should be delivered by an integrated project team whose decisions on critical matters - especially design, risk and cost - should be underwritten by project insurance.

4.  It is not proposed to develop this since the ground has already been covered in the various reports. Reference should be made to Re-thinking Construction (Sir John Egan, 1998); Improving Public Services through better construction (NAO, March 2005) and Construction matters (House of Commons Business and Enterprise Select Committee, 2008).

However we invite the Treasury Select Committee to recommend as follows:

There should only be financial close on pfi projects when it is demonstrated that the construction of the facility will be undertaken by integrated project teams. furthermore the government should require departments to nominate pfi projects that are suitable to pilot project insurance that will underwrite the cost plan agreed by the team.

5.  We have already made reference to the fact that there is inappropriate risk allocation in supply chain construction contracts on PFI projects. A major problem for construction firms in the supply chain is payment abuse such as lengthy payment periods and spurious grounds given for not discharging payments. We, therefore, invite the Treasury Select Committee to make two further recommendations:

(a)  All supply chain construction/maintenance contracts to be let using nec forms of contracts.[95] these should be unamended with the exception of the "z clauses" permitted by the cabinet office dealing with matters such as confidentiality and security.

(b)  All supply chain payments on pfi construction contracts, maintenance and facilities management contracts should be made through a project bank account. (The remaining part of this submission explains in rather more detail the concept of project bank accounts).

The House of Commons Business and Enterprise Committee's 'Construction matters' Report of July 2008 stated that 'both the Office of Government Commerce and the National Audit Office have endorsed the use of project bank accounts as a means of improving payment practices and facilitating integrated working. Central government procurers should now start to make use of project bank accounts, where practicable and cost-effective. The OGC should monitor take-up and evaluate benefits'.

In November 2010 the Cabinet Office recommended that public sector procurers should move towards the use of PBAs "unless there were compelling reasons not to do so".


The use of PBAs will establish a fair and transparent payment system which ensures that those firms delivering and managing the facility receive prompt payment for monies that are rightfully due to them through the payment mechanism in their contracts. The account could be, initially, set up by the Special Purpose Vehicle. The account should be ring-fenced through a trust deed and all authorised payments should be made directly by the bank to members of the supply chain delivering and managing the facility.[96]

With the money held independently in trust by the bank as a third party, there is increased transparency over cash flow. One can see exactly when and to whom monies are being transferred to. This gives assurance to the team that payments will be made promptly, thereby improving trust and collaboration (leading to fewer disputes, better value for money and increased productivity) and resulting in further savings over time through reduced overheads associated with debt collection and administration. In addition their use should, in theory at least, avoid the need for parties to price for insolvency risk, thereby providing a further cost benefit. A major advantage of project bank accounts is that the supply chain is protected from insolvency of firms higher up the chain since the monies, as trust monies, are not available to creditors; in the event of an upstream insolvency payments can still be made to the supply chain directly from the bank account.


The Government estimates savings of up to 2½% on project costs through using PBAs. As already mentioned PBAs will promote a culture of collaboration and trust along the supply chain delivering and managing PFI facilities which, in turn, helps to create greater efficiencies.


The industry's standard forms provide for PBAs. The NEC has published a project bank account Z clause.


Crossrail—the largest construction project in Europe - has confirmed that it is using PBAs. The Defence Infrastructure Organisation (DIO) has announced that PBAs will be used on all their construction contracts from 2013 when work starts using the Next Generation Estate Contracts. A recent example was the redevelopment of RAD Wyton, the Midlands Medical Accommodation project in Lichfield. DIO expects to spend around £500m a year on housing for the services, training estate, and regional facilities under its new regional and national capital works frameworks.

The highways agency has also used project bank accounts. therefore there is already considerable experience in using accounts in the construction industry.

May 2011

95   NEC refers to the Engineering and Construction Contract (and related contracts) published by Thomas Telford. The Cabinet Office considers that NEC contracts offer value for money since they require pro-active and efficient project management. NEC contracts were used by the Olympic Delivery Authority and are now being used by Crossrail. Back

96   Barclays Bank, Bank of Scotland and HSBC have PBA documentation such as trust deeds and bank mandates. Back

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Prepared 10 August 2011