ISSN 1608-7143 OECD JOURNAL ON BUDGETING Volume 5 – No. 3 © OECD 2006
The United Kingdom Private Finance Initiative: The Challenge of Allocating Risk
by David Corner∗
Since 1992, the United Kingdom has used a new type of public-private partnership for the delivery of public services: the Private Finance Initiative. In the design of PFI projects, the assessment of risk, and who is best able to manage it, needs to be carefully considered. Using data from government reports and case examples in the British public sector, this article explores aspects of procurement including, among other things, due diligence, public sector comparators, and the consequences of taking back the ...view middle of the document...
Under the Private Finance Initiative, private sector firms take on the responsibility for providing a public service including maintaining, enhancing or constructing the necessary infrastructure required. A total of 563 Private Finance Initiative contracts had been let by April 2003, with a total capital value of £35.5 billion (HM Treasury, 2002-3), and accounting for more than ten per cent of total investment in the UK public sector in 2003-4. This article explores the value for money of the Private Finance Initiative. It argues that there are powerful performance incentives in Private Finance Initiative contracts which at least potentially offer significant improved performance compared to past practices. It suggests that Private Finance Initiative contracts enable risks to be better estimated than in the past, but that the real success of Private Finance Initiative projects also depends on the degree to which risk is genuinely transferred from the public to the private sector and optimally shared. It also considers some of the difficulties this presents for accounting for Private Finance Initiative projects. It draws on the work of the United Kingdom National Audit Office and the House of Commons Committee of Public Accounts which have both examined and reported to the United Kingdom Parliament in detail on a number of individual Private Finance Initiative projects as well as other general issues arising from the initiative.1
2. Risk under conventional procurement in the public sector
Public service delivery is a risky business. The operation of any organisation, public or private, involves risk. But public service agencies operate across a diverse range of activities, markets and locations. Many of the projects they have responsibility for delivering are large or unique. They may not have precedents on which to draw to help guide implementation. And they are usually more exposed to political and reputational risk. Despite this it is only in the last ten years, that public sector policy makers and implementers have turned their attention in earnest to risk management techniques. Effective risk management involves anticipating, preparing for, and mitigating adverse outcomes, without eradicating, or unnecessarily
OECD JOURNAL ON BUDGETING – VOLUME 5 – NO. 3 – ISSN 1608-7143 © OECD 2006
THE UNITED KINGDOM PRIVATE FINANCE INITIATIVE: THE CHALLENGE OF ALLOCATING RISK – 39
hindering, beneficial risk taking. Well managed risk taking also presents opportunities to innovate, experiment and develop new ideas where more traditional ways of working are not able to deliver real change; for example, in providing an environment where radically new or different approaches can be developed in the confidence that the associated risks will be well managed. Indeed the greatest risk of all may be not taking any risks, where services and the way they are delivered do not anticipate change or evolve to meet new demands from citizens. Constructing and...