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HAS CARILLION FALL TAINTED PFI MODEL?


Join the Think Tank to have your opinion reflected here — 
editorial@fm-world.co.uk


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©Ikon

05 March 2018 | FM World team

newsdesk@fm-world.co.uk


This month, we asked for your views on the sustainability of the PFI model. We present our findings below.


It is a model that can work well

Chris Jeffers


Debate on the outsourcing of FM services within PFI agreements has been around since the form of contracts was created, and recent events in our industry will see this increasing for good reason – it is right and proper that large, costly and complex agreements over long periods of time should be challenged for value for money and best use of resources. 


With such scrutiny, it is easy to forget why PFIs were established – a contract mechanism to deliver major projects using private sector expertise, which could not be delivered via the public purse alone. 


This remains the case today and, while it is easy to highlight concerns and problems with the approach, which are undeniable and need addressing, there is no credible alternative currently available. 


The cost of bringing existing agreements back under public ownership is likely to be exorbitant, and there is the risk transfer issue that would need to be considered. This seems like a classic case of ‘baby and bath water’.


There are many PFI agreements running that do deliver on original intent, providing vital services to the public. For a balanced debate on this, our industry needs to hear more about these, understanding what makes these projects successful, or else we risk a knee-jerk reaction to what are clearly unacceptable consequences of ‘bad PFI’. 


We should look closely at why PFI projects get in the news for the wrong reasons – is it the PFI model per se, or are there other reasons such as poor business management and lack of commercial expertise?


Chris jeffers, partner, head of FM consultancy, Rider Levett Bucknall



Peter Roberts

Model review is essential for Good FM in PFIs


The NAO report tells us nothing that was not obvious to anyone bidding for or working with the specification of PFI contracts: borrowing over the long-term, from anyone other than government itself to fulfil PFI commissioned projects and repaying on an ongoing basis, will always cost more than if funded immediately out of treasury coffers. 


But many projects would neither have been started nor delivered if it hadn’t been for PFI initiatives. Government at the time didn’t want to be seen to spend capital. The other early failing was the impracticable insistence of the public sector to tie every specification down in such a way that the need for flexibility was not incorporated. Common sense says that specs written three years before the start would be likely inappropriate for requirements five years down the track, let alone 20 years. At the end of the PFI lifespan, the ownership of the asset reverted to the ‘client’ who may not have had the funds, inclination or requirement to refurbish and continue to use those premises created 20 years before.


Public sector procurers treated the partner as a supplier rather than a trusted partner. Potential partners had to spend often millions of pounds to have teams involved, maybe over two to three years in bidding each project to the detriment of the rest of their business.


About provision of FM in PFIs: good FM is essential but has to be reviewed. Even in a reasonably close partnership I’ve seen examples where the client FM often had a bigger team to monitor ‘performance’ than the PFI partner had to manage service delivery. A punitive system of penalties stopped close and fair delivery or reception of innovative and sensible improvements by the PFI partner.


A better model built later for smaller spend is the LIFT model. Here the client (often NHS) and sponsoring government department (e.g. DoH) were shareholder partners with a selected private sector partner in an entity set up for the purpose of fulfilling all the client’s project requirements without going back to market.


Private sector sourced the capital and found suitable locations, designs and budget to the client’s brief and agreed to by the LIFT company board. The LIFT Company automatically was the preferred partner for any project needed.


The client and government had transparency and influence over how the project was devised, managed, delivered and maintained. They were on the LIFT company’s board and shared profits from the venture.


Peter Roberts, regional FM at Arcus FM



Report Questioned PFI efficiency


Three days after news broke of Carillion’s liquidation, the National Audit Office (NAO) released a report about PFI contracts and its successor PF2. 


It found “no evidence” that assets were operated more efficiently under PFI, with often added burden carried by taxpayers as a result of unforeseen costs further down in the project. 


The report calculated that annual charges last year were more than £10 billion and payments that need to be made until the 716 deals currently in operation expire in the 2040s will climb close to £200 billion. More than 90 per cent of the government’s capital investment is publicly financed.


The report noted how the government’s National Infrastructure Plan in 2010 warned that capital raised through PFI cost 2-3.75 per cent more than state borrowing. It also revealed that schools built using PF2 were 40 per cent more expensive than than the public sector alternative.


But PFI remains an attractive option to government departments as it allows them to pursue investment options in cases when their budgets are insufficient. Five of the six departments asked for responses said their capital budgets would not have covered new investment, hence the use of PFI. A downside is that these departments are then tied to a long-term commitment that might incur additional costs.


As well as the long-term commitments in general, PFI’s set-up means any changes to contracts can raise costs, with investors charging administrative and management fees. The report gives the example of a PFI school rising from £60,000 to £100,000 after fees were added. The local authority challenged this and the Special Purpose Vehicle (SPV), which refers to the private finance company set up for the contract, agreed to drop part of its management and approval fees. Bank fees of £20,000 still had to be paid.


The report said the Treasury usually discourages public bodies from borrowing privately but, in the case of PFI, the opinion that there will be more efficient delivery sways the advice.


Ultimately, the report cited a lack of available data to determine the benefits of private finance procurement. It called for a “robust evaluation” as to whether the higher borrowing rates were offset by reduced risk to taxpayers and better quality facilities.