Son of PFI

While private finance initiatives continue to be seen by many as the villain of public sector procurement there are converts who believe a 'son of PFI' could be crucial in meeting Britain's large infrastructure needs – but the competitive dialogue process has been overused
RGA GODZILLA VS KING GHID#1.JPG Kempachiro Satsuma as Godzilla
PFI may be seen as a monster by some but son of PFI might prove useful when it comes to tackling huge infrastructure needs. Photograph: The Ronald Grant Archive

The spectre of private finance initiatives as "the unacceptable face of capitalism" continues to persist not least in the recent criticisms over the profits that can be made by private sector companies.

While a report by the European Services Strategy Unit published figures over the last decade showing vast profits could be made under "an inadequately monitored system", the Public Accounts Committee concluded that the goverment was "missing a trick" when it came to securing financial advantages for the taxpayer, and questioning its value for money.

But the government has some ambitious infrastructure plans – a raft of green energy schemes and the new high-speed rail line to name just two – and private investment will be crucial to getting these off the ground.

Even PFI's most prominent critic of the day, Tory backbencher Jesse Norman, acknowledges there is a "huge infrastructure need", adding that there is "potential for [a] 'son of PFI'". Norman is now leading a campaign to get a rebate from PFI contractors.

It is against this background that, at the end of last year, the Treasury issued new guidance on the use of PFI. Notably, the documents offered little in the way of new approaches to delivering projects. But they did take issue with the competitive dialogue process, which has been used in the vast majority of PFI procurements over the past few years.

Many in the industry have long hated competitive dialogue, because it requires at least two bidders to develop their plans almost to the point of delivery – resulting in significant costs that only the winning bidder will be able to recoup through the course of the project.

For the losers, the costs simply have to be swallowed and, in most cases, factored into their next bid, thereby pushing up the cost of projects the more the process is used.

"Competitive dialogue has been a nightmare," admits one senior banker. An advisor at one of the top consultancies goes as far as to say it "doubles the cost of procurement".

"The industry has done itself a great disservice about how procurement has evolved," says Julian Rudd-Jones, of developer Kajima. "Every time people reviewed it, they said it needed to be simpler, but they ended up making it more complicated." The new document argues greater use should be made of alternative methods, and the Treasury is now developing guides on the open, restricted and negotiated procedures.

The Treasury's review does note that in some complex cases, competitive dialogue can prove a useful tool. "Those who have used it do say that when you get to the end of the process, it allows you to compare apples with apples," says John Bland, treasurer of the Greater Manchester Waste Disposal Authority.

Bland points out his authority used the negotiated procedure with some success in delivering the highly complex Greater Manchester Waste PFI.

But in truth, competitive dialogue has generally been overused. "There has been a terrible habit of over-competing in the UK," says one contractor.

So what now for future partnerships? So-called smart PFI may be the answer to Norman's call for a son of PFI. Under this approach, contractors can tender for schemes by costing a previously built design, while the procuring authority develops the detail.

John Cole, of Northern Ireland's Health Estates Investment Group, developed the smart PFI idea having worked on the Enniskillen hospital project – one of the first to go through the competitive dialogue process and which took over five years to reach financial close. But he is yet to use the new approach on any project.

And that is a potential problem across the industry. "It's a shame [competitive dialogue] wasn't dealt with two or three years ago," says Nick Prior, of consultancy Deloitte. He argues it would be more "appropriate" if there were more projects in the pipeline.

It might mean, however, that the public sector is in better shape to use private investment – and more impervious to the criticisms associated with spiralling bid costs – when projects do begin to flow. "The idea we won't have private delivery [in the future] is inconceivable," says partnerships academic John Tizard.

"The question is what form that private delivery will take and how it will be applied."

Paul Jarvis is editor of the Partnerships Bulletin

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