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What are the benefits of PFI in procurement?

The Government’s move to adopt International Financial Reporting Standards from 2009 has generated speculation about the future of the Private Finance Initiative. By Jonathan Hook

If the accounting imperative to structure projects as ‘off balance sheet PFI schemes’ disappears, will PFI dry up? And if it does, will this matter?

Well, it will matter if PFI does have benefits as a procurement method. So this is a good time to ask what benefits private finance has actually brought.

PFI has made a difference to large, asset-intensive projects, and the role of private finance within PFI has been a big part of that. In particular, the role of debt has exerted beneficial discipline on public and private sector alike. Equity investment has helped the integration, as well as providing an incentive for sustained good performance.

In principle, some benefits of private finance could be brought about by reforms to project control disciplines and through other non-PFI contractual mechanisms. But it is not easy to see how they could fully match the disciplines arising from externally provided finance.

There are ways of improving PFI, some of which will become easier to develop now that accounting classification is becoming a non-issue. In particular, there are ways of reducing the costs of externally provided senior debt, though these will need to be carefully calibrated so as not to weaken its -disciplinary influence.

At face value the private sector cost of capital is higher than the Government’s cost of debt. So governments are under pressure to push down the private sector’s cost of finance.

Taken to the extreme, this could lead to attempts to erode the cost premium through wider use of conventional procurement. This would, however, be to forget the hard-learned lessons of the past, and to revert to thinking that cheaper is better. The challenge for the public sector is to allocate risks optimally between itself and the private sector; and then to run procurement programmes so that the private sector receives an appropriate but not excessive reward.

PFI has brought a number of benefits and the construction industry - as equity investor as well as contractor Đ can be proud of the role it has played.

Jonathan Hook is UK construction and house building sector leader at PricewaterhouseCoopers