In April 2004, in its Green Paper, On Public–Private Partnerships
and Community Law on Public Contracts and Concessions, the
European Commission used the term ‘phenomenon’ to describe the spread of public private partnerships across Europe. As will be dis- cussed later in the chapter, PPPs and in particular the PFI, are now a global procurement model in which the UK is a world leader in terms of experience and know-how. Jimmi Bradbury, International Director, Cyril Sweett explains the recent increased interest in quantity surveyors in America for example to the realisation that PPPs and the PFI has so much to offer a country like the USA, where budget deficits are so high and public sector capital so lim- ited. A particular case in point and a suitable case for PFI treat- ment is the state of California; the world’s fifth largest economy, but with massive budget deficits that makes it impossible, using conventional funding and procurement techniques, to replace crumbling infrastructure.
The origins of the UK Private Finance Initiative lie in the intro- duction, in 1981, of the Ryrie Rules, after Sir William Ryrie, a for- mer Second Permanent Secretary to the Treasury. These rules were
ostensibly a means of allowing private financing and were devel- oped to try to minimise the impact of government funding restrictions on possibly profitable investment by the nationalised industries. The rules were constantly criticised for being restrictive and gave public bodies little incentive to seek private finance alter- natives and consequently there was almost no use of private finance in infrastructure projects until the construction of the Channel Tunnel in 1987. In an attempt to stimulate increased awareness a Green Paper, New Roads by New Means was published in 1989 by the Department of Transport on privately financed roads. The Ryrie Rules were partially phased out in 1989 and finally aban- doned in 1992 with the launch of the PFI.
The private finance initiative is the name given to the policies announced by the Chancellor of the Exchequer, Norman Lamont in the autumn statement of 1992. The autumn statements of 1993 and 1994 by Chancellor Kenneth Clarke were used to reshape the design and nature of the initiative. The intention was to bring the private sector into the provision of services and infrastructure, which formerly had been regarded as primarily a public sector con- cern. For many political spectators, PFI was a natural progression for the Thatcher Government that had so vigorously pursued a policy of privatisation during the 1980s. In the UK from the end of the Second World War to 1980 autonomous agencies with political supervision, but not control, had been responsible for the delivery of electricity, gas, water, telecom, etc. These utilities were publicly owned assets and in theory any dividends went to the government. In practice, many of the industries were failing and consequently heavily subsidised by the Treasury and taxpayer in order to main- tain employment. Privatisation, it was claimed, would introduce the management skills of the private sector to industries with an ethos of jobs for life and low accountability. In addition, privatisation would open up monopoly markets to other players with consequent efficiency gains and the bonus of added value for the customer. The process was achieved by valuing the publicly owned assets and then selling them off to the public by means of a share issue open to everyone. The privatisation programme proved to be extremely popular with both public as well as politicians and share issues were heavily oversubscribed – the term ‘Stakeholder Britain’ was coined to described the new phenomenon of widespread share ownership.
However, behind the queues of people waiting at stockbrokers’ offices to deliver last minute applications for allocation of shares,
there was the less publicised political agenda that continues to make privatisation so appealing to politicians and has led to its spread around the globe like a rash. At the time of the privatisation pro- gramme the public sector borrowing requirement (PSBR), latterly replaced by the so-called ‘golden rules’, was the benchmark of a gov- ernments’ ability to control public expenditure. It represented the amount of money needed to be borrowed by government to fund capital projects; the lower the PSBR, the more prudent the govern- ment, a point not missed by the electorate whose taxes in the main funded the capital works programmes. If a government needs to raise revenue therefore, privatisation was and still is a very easy way of doing it, as the whole of the proceeds of the sale of the once publicly owned asset can be set against government debts, reducing budget deficits in the short to medium term and thereby lowering the borrowing and taxation levels. It has been estimated that the British Government raised £60 billion by selling previously public owned assets, or what some critics of the programme regarded as the UK’s family silver during the 1980s and early 1990s. Opponents of privatisation also claimed that the money raised could have been substantially higher as nearly all the public utilities were underval- ued by as much as 50 per cent in the government’s dash for cash. Not surprisingly, therefore, the PFI has been seen by some as a means of back door privatisation of public services and trade unions, in particular UNISON, have voiced their concerns over the adoption of the PFI. However, as far as government is concerned there is a clear distinction between the sale of existing public assets, which they see as privatisation, and the PFI, which they do not.
It was against this backdrop therefore that in 1992 the PFI was launched and almost immediately hit the rocks. The trouble came from two sides; first, the way by which civil servants had tradition- ally procured construction works and services, left them without the experience, flexibility or negotiation skills to ‘do deals’, a factor that was to prove such an important ingredient for advancement of the PFI. In addition there was still a large divide and inherent sus- picion between the public and private sectors and very little guid- ance from government as to how this divide could be crossed. There is also little doubt that there was a faction within the public sector that would have likely to see this public/private separation main- tained. Hence, in 1993 a government body, the Private Finance Panel was created to encourage the use of the PFI and further at- tempts were made in 1994 to ensure engagement of the public sec- tor with PFI when the then Chancellor, Kenneth Clarke, made it
plain that Treasury approval for capital projects would not be given unless they had been tested against the private finance model.
The second major problem in trying to get the PFI off the ground related to the way in which a whole range of projects in the early days of the initiative were earmarked by over zealous civil servants as potential PFI projects, when they were quite obviously not. The outcome of this was that consortia could spend many months or even years locked into discussions over schemes with little chance of success, because the package under negotiation failed to produce sufficient guaranteed income to pay off the consortia’s debt due to onerous contract conditions and inequitable risk transfer stipula- tions by the public sector. This practice earned PFI the reputation of incurring huge procurement costs for consortia and contractors before it became apparent that the business case for the project would not hold water. The procurement costs were non-recoverable by the parties concerned and before long PFI earned the reputation of being procurement of the last resort, at least by the private sec- tor. Figure 4.2 illustrates the cost differential between traditional tendering and PFI procurement.
A recent RICS report called for the government to reimburse un- successful PFI tenderers, but to date signs are that there will be no change from the current policy of letting the private sector bear the whole of the risk for bid costs. In the mid-1990s, the trade press ran several vigorous campaigns to revise and streamline the PFI among
Figure 4.2 PFI bid costs.
£ million
£0−25 £26−50 £51−100 £101−200
Contract value (£ millions) 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 PFI Traditional
reports that contractors had incurred costs of millions of pounds during abortive PFI negotiations. By October 1996, Bovis, Taylor Woodrow and other large contractors abandoned PFI bids, citing bureaucratic delays. The 1997 Labour Government was elected to power on a pledge to put partnership at the heart of modernising public services. Within a week of winning the election in May 1997, a Labour Government appointed Malcolm Bates to conduct a wide- ranging review of the PFI. The first Bates Report made 29 recom- mendations of which the dissolving of the Private Finance Panel in favour of a Private Finance Taskforce was key. The taskforce had two wings: an advisory wing and a projects wing. The advisory wing developed a standard learning package for the public sector and helped greatly to disseminate information about the PFI procure- ment process, which until then had seemed something of a black art. Following the publication of the second Bates Report in 1999 and its recommendation that deal-making skills could be strength- ened and that all public sector staff engaged in PFI projects should undergo annual training, PricewaterhouseCoopers were tasked with producing a PFI competence framework. The object of the re- port and the framework was to identify the competences the public sector is likely to require in order to deliver successful PFI projects.
In 1999, Sir Peter Gershon was invited to review civil procure- ment in central government. The subsequent report highlighted a number of weaknesses in government procurement systems as follows:
● Organisation ● Process
● People and skills ● Measurement and
● Contribution of the central government.
Gershon’s aim was to modernise procurement throughout govern- ment, provide a greater sense of direction in procurement and pro- mote best practice in the public sector. Gershon’s proposals for dealing with these deficiencies led to the creation of a central organisation entitled the Office of Government Commerce (OGC).
In June 2000, Partnerships UK (PUK) was established following the publication of the second Bates Report in 1999. Partnerships UK replaced the projects wing of the Treasury taskforce as a joint venture between the public and private sectors with the private sector holding the majority 51 per cent interest – it is itself a PPP!
The mission of PUK is to provide expertise to the public sector in order to provide better value for money for PPPs. Included in its remit is the sourcing and provision of finance or other forms of cap- ital where these are not readily available from established financial markets, it makes a charge for its services. Most significantly PUK can be seen to mark a move towards greater centralisation in the management of PPP projects and the development of standard documents, including contracts, in direct contrast to the mid-1990s when each government department was encouraged to develop its own specialist expertise (Figure 4.3).
However, government was also anxious to spread the use of pri- vate investment into local authorities and in April 1996 the Local Authorities Association established the Public Private Partnership Programme or 4Ps in England and Wales. The 4Ps is a consultancy set up to help local authorities develop and deliver PFI schemes and other forms of public private partnership. The local authority services covered by the 4Ps are, for example, housing, transport, waste, sport and leisure, education, etc.
During the second and third terms of the Labour Government in the UK, a number of specialist PPP procurement routes have been devised in order to meet the needs of particular public sector agen- cies, as follows;