Novel Procurement Options ARBE121 – PFI  Variants, additions to or environments for routes  Private Finance Initiative (PFI) A funding & operational strategy for public sector facilities and services  Partnering A way of linking and aligning the aims and efforts of the project team

PFI – The essential aims ARBE121 – PFI  Public sector organisations’ services Provided within buildings but building provision & operation not core to activities  Organisation buys a building service New facilities and long term operation Service provider usually consortium – financiers, contractors, designers etc…

PFI – Brief History ARBE121 – PFI  BOT and BOOT Build (Own) Operate Transfer Operated world wide for a number of years  Conservative government 1992 – PFI Reducing public borrowing Limited use - mostly on some major infrastructure works  Labour government 1997 onwards Bates review endorsed & extended basic approach Instituted mechanisms to improve uptake and management One component of PPP – Public Private Partnership

UK PFI – The system 1 ARBE121 – PFI  Initiated by public sector organisation Central government, local authority, health trusts etc… Define needs for school, library, hospital etc, etc… in broad description of facilities required  Consortia invited to submit preliminary bids Bids include development proposals, charge levels etc… Public sector organisation selects “best” bid  Negotiation to produce final proposals & contract Actual facilities/services, fee levels, performance measures etc…

UK PFI – The system 2 ARBE121 – PFI  Successful consortium Recruits rest of team (as required) Raises construction finance Procures building as “client”  Finished building enters operation Consortium – provides operation, maintenance, repair decoration etc… of building and often also cleaning, security, catering etc… Public sector operates core service – education, health care Public sector pays fee for building

UK PFI – The system 3 ARBE121 – PFI  At end of service contract Typically 20 to 30 years Assets may or may not pass to public sector  The service fee May be as rental (£/sq. m/year) or per capita (charge per patient, pupil etc) Payments may be reduced if performance targets set in contract negotiations not achieved Must be sufficient to cover: loan repayments and interest on construction costs, actual operating costs, profit

PFI – The advantages ARBE121 – PFI  Reduces Public Sector capital expenditure In the short term new facilities not limited by budget limits No longer sufficient justification – public sector can borrow more cheaply than private, another profit to come out of process, growing use of PFI replaces capital costs with recurrent costs  Promotes innovation Long term contracts creates incentive for private sector technical (building design, construction) and operational innovation

PFI – The advantages ARBE121 – PFI  Changes risk distribution Moves some risks into private sector where they may be handled more easily e.g. consider influence of design and construction on building performance, maintenance, running costs But see also disadvantages below…  Value for money Private sector charges must be tested against Public Sector Comparator (PSC) But see also disadvantages below…

PFI – The disadvantages ARBE121 – PFI  Administratively complex Bid development & negotiation are time consuming and expensive for both parties Some large contractors unwilling to participate  Performance problems Some evidence of failure to meet targets e.g. in NHS projects – is it any worse than conventional projects?  Contravention of EU regulations Procurement through a single “preferred bidder” against procurement regulations UK government seeks exemption

PFI – The disadvantages ARBE121 – PFI  Political opposition Essential disagreement with private profit from public services Union opposition – members’ employment transferred to possibly worse conditions & union membership opposed Criticism of cost comparison models – charges too high!  Change in risk distribution Some so novel parties find them difficult to deal with High uncertainty in long term running costs, consortia carrying demand risk (e.g. number of users) lead to need to renegotiate some contracts

Further reading ARBE121 – PFI PFI Constructor’s key guide to PFI Construction Industry Council Private Finance Initiative – a guidance note, RICS Building, 14/9/2001 & 21/9/2001 onwards New Civil Engineer, 12/10/2000 & 6/9/2001 onwards The Office of Government Commerce – especially the “procurement” sections A government supported body charged with assisting PFI implementation PFI news & information service An PFI investment company The Health Service PFI site