PFI – Is it really the end?

There has been much recent speculation in the press about the future of PFI.

On the 15 November 2009 the Telegraph reported George Osborne as saying   “Labour’s PFI model is flawed and must be replaced. We need a new system that doesn’t pretend that risks have been transferred to the private sector when they can’t be, and which genuinely transfers risks when they can be.”

Of course nobody knows what Mr. Osborne really meant when he said this. PFI will almost certainly be rebranded but will it really be abolished? If so what will it be replaced with?

There is a political consensus that after the 2010 General Election public expenditure needs to be reigned in.  Although PFI was a Tory invention, it was wholeheartedly embraced by the Labour Government as a means to invest in public infrastructure whilst maintaining the pretence that its own fiscal rules on borrowing were not being breached.  There can be little doubt that a Tory Government would wish to take the hatchet to its wayward creation if for no reason other than to symbolise the end of New Labour, but are its flaws really terminal?

Let’s briefly consider the shortcomings of PFI.

The procurement process is in some circumstances overtly protracted and most certainly reduces competition. Indeed on the 24 November 2009 Partnership for Schools announced a  review to shorten the procurement process and doubtless there is plenty of scope for the process to be streamlined.

The high cost of funding PFI is a real issue but unless the Government is to use public finance to build such infrastructure then the markets will simply dictate the cost of private finance. Perhaps if there were increased appetite for investment in such projects then the cost of finance and the rates of return sought by the private sector would reduce.  If the risks associated with bidding for such projects were reduced (something that is clearly within the powers of the Government) then arguably the costs of finance will also reduce.

When George Osborne talks about inadequate risk transfer I do not believe he is talking about the construction phase of such projects. Yes PFI Building Contractors seek higher margins for PFI work but the risks that they are required to take for such margins are considerable.  Few people would argue that there is anything other than full risk transfer to the Building Contractors under PFI and a search of Google informs us of the significant losses incurred by numerous Building Contractors when their PFI contracts have turned sour.

So, if we discount the above, the only element of PFI that requires intensive care would seem to be the Operational Phase. Maybe it is this element of PFI that George Osborne is critical of?

The private sectors involvement in the Operational Phases was essentially designed to enable payment to be drip fed to the private sector on a performance related basis.  The contracts that govern the operational phase are extremely complicated and numerous concerns have been aired about the inability of the public sector to understand or indeed manage such contracts. HM Treasury has commissioned surveys into the effectiveness of such contracts and the extent to which the public sector understands and correctly operates the contractual machinery to ensure that it is receiving best value.  Perhaps surprisingly, such surveys tend to suggest that public sector contract managers are on the whole confident that they understand the Operational Contract and are confident that they are receiving the service that they are paying for.

Having spent many weeks working with operational PFI contracts   I have to say that, as a lawyer, I am surprised with the suggestion that they are generally understood and effectively operated.   I suspect that the reality is that there is considerable room for improvement and that the public sector is not necessarily getting best value for money. I would be interested to hear the opinions of those from within the public sector who work with such contracts at the coal face on this point.

PFI is not in my view fundamentally flawed but there are certain aspects of it that require treatment.