Following its introduction in the early 1990s’,
PFI initially took some time to gather momentum, with just 7
schemes signed before 1995.
2003 was an unusual year, distorting the numbers
somewhat, reflecting the very large London Underground project
signed that year. The number of projects increased steadily
through the 1990’s reaching a peak in 2000, however the combined
capital value of schemes showed a steady increase. This
reflects a trend towards projects with larger capital values,
with a rise in average values from around £36m in 1996 to £70m
in 2005. By the end of 2005 more than 700 PFI projects were
financially closed in the UK, with the Treasury estimating their
value at almost £50bn.
Whilst this has been partially influenced by a
number of very large projects such as the London Underground
scheme, it also reflects a general trend towards projects with
larger capital values supported for example, by grouped schemes
in the schools sector. Smaller schemes are generally less
attractive to potential bidders, due to the disproportionate bid
costs and this, combined with the Treasury view that they are
unlikely to offer value for money, is likely to drive a
continued trend towards larger and grouped projects.
Despite continued controversy over the use of PFI,
with opposition from trade unions and certain local community
groups, the Government remains committed to PFI as a means of
procurement. PFI now plays a significant role in public sector
capital investment, accounting for around 11% of capital
investment in public services in 2004/05. However, whilst
investment through PFI has increased steadily over the last few
years, this has been roughly in line with overall increases in
overall capital expenditure, with the proportion accounted for
by PFI remaining relatively constant.
Overall, the Department for Transport is the
leading sponsoring government department, accounting for around
51% of PFI schemes by capital value. Whilst the number of
schemes sponsored is relatively modest, they are generally of
high capital value, with half of the DoT signed projects in
excess of £100m. Analysis in terms of capital costs produces a
shift in mix towards the DfT, with other sectors where
operational costs are higher taking a larger share if considered
in terms of lifetime costs. Other sectors taking a large share
of PFI projects by capital value include the Department of
Health, the Ministry of Defence, the Department for Education
and Skills, as well as the Scottish Executive.
However, the mix of sponsoring departments is
gradually changing. Whilst the number of grouped secondary
schools and healthcare schemes coming on-stream has increased
significantly in recent years, certain Government departments
have exhausted most options for using PFI. Also in early 2006
the Government placed most major health-based PFI schemes on
hold subject to a review, so it may be that the importance of
this sector diminishes in the future.
In 2005 the Department for Transport share is
modest, while in 2003 it would have been some 76%. The share
taken by Transport in 2003 was significantly affected by the
unusually large London Underground project. This illustrates a
project-driven trend, with MOD projects also significant in 2003
and 2004, but far less so in 2005 at 4%.
There is a reasonable spread of departments
accounting for PFI projects in 2005, with no one department
dominating the market. The key departments include Education and
Health in 2005, though with major capital expenditure committed
to the Education sector in years to come, this sector is likely
to generate the larger shares.
Sectors likely to provide potential for PFI
schemes over the next few years include grouped schools, social
housing, roads, light rail and street lighting, as well as
schemes for the police forces and courts. Expenditure in the
health sector may well depend on the outcome of the current
Governmental ‘Emergency Review’. This particularly applies to
the larger ‘acute’ hospital schemes.
High bid costs and lengthy procurement times
continue to be key factors affecting contractors. This has
forced many to limit the number of PFI contracts they bid for
annually, as well as contributing to the market withdrawal of a
major contractor, Ballast, in 2003. Whilst the mandatory
introduction of standardised contracts across all departments is
expected to have a positive impact, with procurement times
averaging between 18 months and 2 years, its success it only
likely to be apparent in the medium term.
In the meantime the restriction made by
contractors on the number of contracts bid for annually is
having an impact on ability of projects to attract bidders, with
some complex or less attractive projects attracting only one or
two bidders. In the longer term if this trend continues it may
affect the ability to procure projects under PFI, with EU
procurement legislation, which came into effect on 31st.
January 2006, requiring at least 3 bidders for such schemes.
Alternatively there may be greater competition
attracted from overseas for the projects.
The majority of PFI projects are Design, Build,
Finance and Operate (DBFO), encouraging bids from consortia or
large conglomerates with divisions providing both construction
and support services. Furthermore, the high bid costs involved
tend to favour larger companies or consortia able to absorb the
costs in the event of a failed bid.
