The Private Finance Initiative (PFI) has been subject to criticism in recent years for higher financing costs when compared with traditional publicly funded capital investment. The UK Government’s new Private Finance 2 (PF2) delivery model has sought to address key concerns with PFI, through a more transparent structure which allows visibility of when the wider benefits it offers (such as risk allocation to the private sector) justify the additional costs. Whilst PF2 targets new contracts, the UK Government has made a concerted effort to allow these improvements and those made before it to be applied to existing contracts. With £2.1bn of realised through this initiative to date, it is keen to maintain this momentum.
Government has a strong grasp of where benefits and drawbacks are provided by PFIs, with a diverse range of contracts now in place. The standard contractual provisions underpinning most PFI arrangements (known as ‘Standardisation of PFI Contracts’) has been refined since its introduction, with its latest guise offering much greater flexibility in areas of concern to the public sector. By way of example, the removal of soft services from the scope of education private finance arrangements was driven from an understanding that the private sector derives a large proportion of profit from these arrangements, which were priced at a premium given the length of contract entered into (typically 25 – 30 years). Each PFI contract can benefit from being reviewed to identify areas for improvement, often informed by more recent developments in standardised contracts. Equally, many PFI contracts have refinancing mechanisms which can provide a significant decrease in costs, given the low interest rates now available across the infrastructure sector.
The Operational PPP Efficiency Programme was created in 2012 to deliver savings worth £1.5bn. As this target has been exceeded, the programme is looking to achieve further savings of around £2bn through the deployment of lessons learned from PF2 and the savings already secured. Private finance should deliver value for money at all times; applying tools from the latest delivery models to existing contracts will allow this to be achieved.