The Development of PFI – Post 1992
The 1993 budget statement sought to stimulate greater involvement from the private sector following little interest being expressed. Yet nearly a decade later the controversy still rages over the policy with Stefanou, Chair of Local Government Procurement Panel, cited by Hirst (2002) commenting that “the city had been getting much too starry eyed over support services investments with everyone chasing that pot of gold”. A significant change to PFI came within the election of Labour in 1997 who re-badged the scheme as Public Private Partnerships.
Government reforms were introduced into procurement to meet the efficiency, value and modernisation agenda, led by Sir Peter Gershon, identified weaknesses in procurement and led to the standardisation of PFI contracts. This new standardised contract had the aim to “enable public sector procures to meet their requirements and deliver best value for money”. Subsequent revisions to the SoPC in 2002 and 2004 have not altered the original requirement to achieve and deliver value for money.
Chapter 3 reviews UK literature on public service delivery. The first step is to establish the history and definition of PFI. As PFI was not the original procurement process, next section provides an overview of traditional and PFI processes to clarify both. This will be followed by highlighting the main issues surrounding PFI; one of these issues is PFI consortiums’ attempts to increase profits and this will be explored in more depth, gathering literature on the significance and implications of this issue.
Finally, a summary of government policy and regulation – towards mediating this main issue completes the review. PFI was officially announced by the Chancellor (Norman Lamont) in 1992: ‘with the aim of increasing the private sector in the provision of public services’. PFI is considered a form of PPP; PPP is a generic term for the relationship formed between private sector and public bodies. The function of PPP is stated by Treasury (2000) as introducing private sector assets and services to public bodies.
The Private Finance Panel (1995) defined PFI as being a new procurement process, that it ‘enables value for money’ and ‘through competition enables innovation’. The NAO (1999a ;2001) definition again mentions the perceived benefits and goes onto say ‘PFI can enable departments to undertake projects which they would be unable to finance conventionally’. Interestingly this means the reduction of risk for public bodies is due to private finance being used instead.
It also gives the impression the UK Government’s ‘other’ reason for using PFI which is due to accounting purposes – which may mean not all PFI is awarded due to VFM but because they can be financed by somebody else. From the above definitions we can summarise the key perceived benefits of PFI are: introducing resources, expertise, risk transfer, innovation and better management – all of which lead to VFM and thus on budget and on time. Sussex (2001) describes the traditional procurement process as “…
financed by the Exchequer, designed by external consultants in conjunction with the public sector client and constructed by private sector contractors following a process of competitive tendering. On completion, the infrastructure is operated and maintained by the public sector client, either directly by in-house staff or indirectly using private sector contractors. The public sector client owns the infrastructure and uses it to provide services direct to the public”. Treasury Taskforce (2000) explains the method used in deciding on which route is best value for money.
The Treasury uses the Green Book guidance to decide, developed by Treasury Taskforce (2000), which states there must be a comparison of the PSC to the PFI bidder estimates. Boussabaine (2007) defines PSC as ‘the notional annual costs were the scheme to be conventionally publicly financed, as a means of assessing VFM’. If the PFI cost scheme is less than the PSC then the PFI route is chosen. However the lowest bidder for the contract is not necessarily the chosen winner; as the awarding authority may also decide on design quality and potential innovation as stated by Allen (2001).
Unison (2005) mentions the PSC is an original adjusted figure from a similar project and then increased by 2-23% as required by the Green Book guidance. The justification behind the increase is ‘demonstrated, systematic, tendency for project appraisers to be overly optimistic about risks’ (Treasury design – green book). From this Unison (2005) says that bias is thus likely to occur, when deciding on which procurement route to choose from; bias can occur in three different instances.