8 January 2018
Value for money in PFI contracts has been questioned in recent years, but abandoning PFI would be damaging. Nathan Holloway, Divisional Director at WYG, looks into what the future holds. The article was first published on W: building.co.uk.
Private Finance Initiative (PFI) contracts have had pretty bad press over recent years with value for money being questioned and the implementation of new schemes significantly reducing from the peak period under the former Labour government, when over 600 agreements were signed off. Ironically, the Labour party is now enthusiastically citing the failure of these schemes and is promising to take ‘back in-house’ many schemes if they gain power at the next election.
With this political uncertainty and the unknown impact of Brexit, it’s understandable that there is currently less demand for new agreements. But abandonment of PFI would undoubtedly be damaging for UK infrastructure and possible government intervention in existing agreements; taking them back ‘in-house’ would be complex and expensive.
One alternative to PFI is a suggested increase in appetite by government to underwrite infrastructure projects through Treasury-backed bonds. This alone, however, is unlikely to facilitate the required scale of infrastructure improvements at both a local and national level and a balanced mixture of public and private backed investment options is more likely to be effective.
Whilst some of the early PFI agreements have not always delivered value for money, it is apparent that later agreements were more effective, becoming less expensive for government and providing greater value for the taxpayer. A strong pipeline of projects from 1997 to 2010 resulted in healthy competition among contractors and investors and better understanding of risk, with most assets built on time and on budget. This meant that the PFI sector attracted more private sector participants and the subsequent competition has driven down the cost of new projects for the public purse.
This pioneering approach in the UK has already benefited other markets and private finance initiatives are considered an efficient method to accelerate the procurement of new infrastructure in countries such as Canada, Australia, the Netherlands, Norway and Colombia. Development of PFI in these markets has undoubtedly benefited from the lessons learnt in the UK.
One of the key lessons from early PFI agreements in the UK was the consideration of life cycle costs and implications on the end-users over the term of the agreement, which, in some instances, had resulted in initially modest monthly payments spiralling out of control. Incidences of schools paying over the odds for basic improvements make the headlines and result in a broad perceived failure of PFI.
One thing that is certain is that the introduction of private finance has resulted in the development of public facilities that would have otherwise been unaffordable, but early schemes suffered from a lack of appreciation of life cycle costing, with technical expertise not drawn upon to support the initial agreements.
Early technical advice is therefore critical if future PFI is to be a success in both creating new assets and achieving value for money whilst also providing a reasonable margin for investors.
Adoption of Building Information Modelling (BIM) is also an opportunity to reduce initial and life cycle costs, as early engagement with end users allows for improved configuration of space and integration of design efficiency. If applied correctly, there’s potential for the team that will be responsible for operation and maintenance to advise on ways in which the operational costs can be reduced, or at least controlled, over the contract period.
WYG is currently supporting a number of major public and privately backed schemes that expect life cycle cost certainty. The early inclusion of cost and facilities management, together with robust digital design has facilitated stakeholder engagement and assisted us in delivering projects on-budget whilst exceeding operational expectations. The inclusion of this technical expertise is vital in the evolution of new PFI agreements.