Yippee! At last the government has announced details of the PFI reforms and we have PF2, which has received a warm response from the industry. This may be because we have waited so long for news of how the PFI market would be restarted and because every little helps in the current climate. But the new proposals have failed to tackle head-on the real issues and PF2 represents a massive missed opportunity, writes Martin Chambers.
The greatest area of risk in a PFI project is the design and construction stage of the contract. The new model could have easily introduced a way to keep this element ring-fenced with its own funding stream, almost certainly this would offer best value if financed by the government.
Under such a scenario the finance part of the deal could then be sold on after practical completion when the D&B risk has been dealt with. This would make the “operational phase package” much more attractive to institutional investors which would in turn allow government to recycle its initial investment into further PFI schemes. An added benefit would be to change the focus from PFI being a bottomless financing requirement to one where government is providing a revolving start-up funding facility. This approach would also help shorten the time to start on site for PF2 projects.
Instead, what the government has sadly done is introduce a potential new risk for contractors. The proposal that the procurement period will be limited to 18 months is worthy and on the face of it good news. Certainly as the previous 2-5 years that it usually took to get a deal signed is clearly unnecessary and costly. However, there is no firm indication that bidders will be reimbursed their costs if the client misses the 18-month deadline.
The Treasury says that the government will retain discretion to make a “contribution” to failed bid costs of shortlisted bidders where it sees fit. This is, to say the least, just too vague and at worst a licence to legitimise poor performance by the client. The government should, where the client fails to meet the 18-month deadline, have the guts to underwrite the costs of all the bidders.
One of the problems of the old PFI was the costs of bidding and this new time limit will, unless industry stands up and says “no thank you”, increase the financial risk placed on those choosing to bid. If the project can be pulled from under them because of the failure to meet the 18-month time limit, with no certainty that their costs will be recovered, then I wouldn’t be surprised to see companies shy away from bidding.
Only time will tell on this front, but rest assured when the first PF2 scheme fails to meet the 18-month deadline and gets pulled by government (without absolute guarantee bidders having their costs reimbursed) the PF2 model will come in for some serious criticism. I predict bidders will vote with their feet, or perhaps more likely their lawyers.
Looking at the overall plan for PF2 there is some good news tucked in the proposals, the decision to allow the scale and scope of soft FM services such as cleaning and catering to be held outside the equation is a good move. These services, along with the “profits from re-financing” have to date been a significant source of criticism for PFI.
So PF2 looks like a case of one step forward and two steps to the side by government. Given that much of the initial PF2 focus is going to be on schools I guess it’s only fair to mark this piece of work as 4 out of 10, must try harder.