PFI consortia are being lined up by the government's spin machine as the next cohort of bad boys who are robbing the taxpayer; operating costs of the PFI schemes now live are running at some £8bn a year, and the government wants to see reductions.
One of the most fundamental problems with PFI is that the contracts were all written by civil servants who have little or no knowledge of the way in which the private sector prices risk. Their explicit aim was to transfer risk from the public to the private sector, get the costs of risk off the Treasury's books, and this they have done - but at a cost. Take the example of a student's Hall of Residence procured under a DBFO (design, build, finance, operate) PFI framework. The consortium has two partners, a construction firm and a facilities management organisation. The contract period is 25 years.
First, development risk. Given an adequate outcome specification (the Employer's Requirements) D&B is a highly cost effective way for clients to develop assets. Unless of course, as is the case with our example Hall, the government were a year late in letting the contract but still insisted on the original completion date, resulting in a cost per square meter some 40% higher than it could have been. The government are utterly crap at programming an adequate lead-in time for major capital projects, and internal client delays rather than site delays are invariably the major reason for development cost over runs for such schemes.
Secondly, operating risk. And this is where the risk-transfer is most poorly understood. The contract is 25 years, about the same as the economic life of the Hall's building systems and roof. If the private sector is taking the risk of no down-time to the building, it will cost-in some expensive mid-term major repair and replacement work whilst maintaining occupation. Ker-chink. The private sector is also taking income risk; the government's forecasts are based on a simple 95% occupancy during the life of the facility. The private sector may estimate 75% occupancy and add something for irrecoverable bad-debts. Ker-chink. The private sector takes the risk of highly specified cleaning and maintenance standards with severe financial penalties, so costs-in the standard it thinks it can achieve consistently plus an allowance to cover the cost of the penalties. Ker-chink. The government has also transferred large parts of inflation risk to the private sector, so the FM contractor makes 'safe' estimates of cost increases; if these are just 0.75% higher each year than the reality, the contract becomes highly profitable after just three or four years. Ker-chink. And don't mention window-cleaning; the civil servants have warranted the contractor's window-cleaner access to the students' bedrooms from 8am. Ker-chink Ker-chink.
In every case, the private sector has made perfectly reasonable allowances for the risks the government is seeking to transfer; the government's desire for cost-certainty has outweighed commercial sense. The only way to claw-back costs is to re-allocate risk. Simple, no? Er, no. If the government takes back risk, the potential cost of the risk is a liability that must appear in the government's accounts.
Which is why the government is adopting the only tactic that it can see - to bully the consortia into surrendering profits at the threat of being black-listed from public sector work.