Frank Griffiths letter - 0116 279 3383 / Page4

Contract News

PFI Resolving the Underlying Problems

The recent seminar* "The Private Finance Initiative - Resolving the Underlying Problems" demonstrated the successes and failures of the PFI so far and examined steps to improve the success rate.

Of course it is early days yet to measure success. Most PFI projects are to run for many years. It will take time to assess whether the service has been efficient, reliable and economical. But there are some powerful indicators, for example, save for some unforeseen disaster, the QE2 bridge for the Dartford crossing promises to be a win win project. It has some rare features:-

the operators can be reasonably confident of the cash flow generated by tolls
the operators - Dartford River Crossing Limited are part of the group (Trafalgar House) which undertook the construction of the bridge.
probably as a result of (2), the bridge was built virtually to budget and programme.

The channel tunnel on the other hand might be seen as a success by the tax payer but is a pretty clear failure for the shareholders and the banks. Interestingly, the project was launched by a group of French and British contractors who had the client "Eurotunnel" forced upon them by the banks after the project had been launched.

These examples illustrate the combined risks of finance and construction. However, the QE2 bridge had a much more foreseeable cashflow than the tunnel, which has still to compete with the ferries.

For Keith Berryman of Nichols Associates, the major difficulty with PFI is a lack of sufficient operators familiar with the private sector way of operating, but with experience of operating facilities which traditionally have been government run. He instanced the bus industry. 12 years ago there were few substantial private operators - now there are a number of major operators but, says Keith, no real sign of stability has been achieved. Further, management has concentrated on take-overs rather than improvement of services. Keith also highlighted the difficulties of maintaining competition when extending the system. A successful city tramway, needing extension was "bought out" after only four years of its licence, so that the city could obtain tenders for building the extension and then operating the whole system. What problems lie ahead with the Tunnel Rail Link where a 1,000 year franchise has been granted?

Guy Stratford of London Underground (LUG) explained how PFI has been successful for important projects, including the provision of trains, escalators, and IT installations. We have all seen how LUG stations and services have improved over the last few years following some 30 years of under-investment from public funds. London Underground has clearly become adept at using PFI.

Other speakers pointed to the costs. Contractors seek higher margins and often still seek to "build and disappear", financiers need higher returns for non-recourse loans and operators need to allow for their long term risks. In addition tendering, requiring foresight, innovation and design is expensive and risky. The costs of bidding, - successes and failures - have to be met by the project(s) they win. Already some well known organisations have withdrawn from bidding for major projects.

Selecting PFI contractors is a lengthy process, it frequently takes more than a year. It is therefore expensive in public sector time as well as to bidders. Much of the time is spent in the negotiation of "one off" contracts involving substantial legal costs.

The conference concluded:

A successful PFI project requires the added value provided by the private sector to exceed its additional costs.
Significant savings can be made in the PFI processes. This will be of increasing importance as Local Authorities use PFI for small projects.
There will be a continuing place for PFI whatever party wins the next election.
PFI schemes are more likely to be successful if the long term client is in place at the outset.
The method of organising extensions and length of the licence period needs review.
There is probably a case for a range of model PFI contracts.
The government should consider ensuring that there is no second facility within a reasonable time and the provision of tax incentives.
The consequences of a major structural collapse and/or company/consortia failure needs further investigation.
Whilst the public sector may be able to "outsource" some risks, it cannot outsource its responsibilities.
*Commercial Seminars Orange House, Orange Street, Uppingham, LE15 9SQ Tel: 01572 821290 for whom the conference was designed and chaired by FGA.

Back to Home Page