The assumption inherent in PFI/PPP projects is that the better management inherent in the private sector’s involvement equals better value for money.

The best way to ensure that value-for-money is obtained, according to Peter Ryan, is for the private sector not only to build a facility or project but to operate it as well. This means they will avoid the temptation to cut corners on construction, as they will subsequently have to pick up the tab in higher maintenance costs. Of necessity, this means that consortia are being formed to build and operate public infrastructure, as a construction company that can build a gaol, for example, almost certainly lacks the expertise to run it.

According to Mr Airey, the National Audit Office does not judge value for money solely by price. “The project must also be deliverable,” he says, “and if someone has priced a bid extremely low, it could be that they won’t devote enough resources to the job to make it deliverable.”

Deliverability is particularly important for high-tech projects.  There’s a new catchphrase that has replaced value for money for these types of projects, which may be impossible to measure against a public sector yardstick: “economically advantageous”.  

Value for money must be measured over whole of life for the project. For example, when London Underground received an offer in 1993 from ABB Transportation Ltd to provide new trains for the Northern Line under a leasing arrangement, the first step was to determine that replacing the existing trains was the best option. The second step was to show that a PFI leasing deal  provided the best value for money.

Four companies were invited to tender and two, ABB and GEC Alsthom, were shortlisted. The difficulty with drafting the specification was that there had to be sufficient transfer of risk to meet the requirements of the PFI, which ruled out a simple leasing arrangement. Instead, London Underground asked for a complete service, which included not only the manufacture of the trains but also their ongoing maintenance and cleaning. The supplier would have to guarantee a certain number of trains would be available for peak service and running reliably. The revenue (ticket sales) risk remained with London Underground.

Value for money can be improved through good management, in areas such as:

• Not over-constructing or gold-plating a project.
• Integrating design with operational requirements.
• Using new technology.
• Economies of scale (as in the schools purchasing example, above).
• Designing the asset to maximise the return from user charges.

It is a fallacy to assume that private sector money comes cheaply. As already noted, governments can borrow at lower rates of interest than companies and consortia. So the cost of money is a negative for PFIs (although it has come down in Britain as the City has become more relaxed about PFI deals). Offsetting this is the private sector’s ability to bring projects in on time and under budget, to be innovative, and to respond to financial incentives for continuing efficient operation.

One option suggested to overcome the higher cost of private sector money is to drop the requirement for private sector funding.¹¹  BOOT (build, own, operate, transfer) schemes would then become DBO deals (design, build and operate). However, this would generate a higher public sector borrowing requirement, which is consistent with the Blair Government’s best value philosophy but would require a quantum leap from our current thinking about PFIs.

To date, PFI has accounted for only a modest proportion of overall capital spending in Britain - around 9 per cent of the total between 1997 and 2000.¹²  But in certain portfolio areas it has had a lead role to play. For example, since 1997 85 per cent of the funds for major NHS capital projects have come from PFI.

The Blair Government is now venturing into the biggest public-private partnerships ever undertaken. Its upgrading programme for the railways, including the London Underground, the world’s oldest subway system, involves the expenditure of a staggering 80 billion pounds over the next 10 years. Underground trains, stations, track and staff – 6000 of them – are to be transferred to three separate infrastructure companies under 30-year contracts which are expected to deliver 13 billion pounds of capital and maintenance work over their first 15 years of operation.

Under the contracts, the private sector companies will be responsible for main-taining the track, signals, tunnels, stat-ions, trains and lifts. The government will set and monitor performance stand-ards, as it did with the Docklands Light Rail (see below) and as the Victorian Govern-ment does with its franchised tram and trains services.

There are major obstacles still to be overcome, in particular those relating to staffing. What entitlements should employees who transfer to one of the new infracos take with them? The contracts were supposed to have been signed earlier this year but (Red) Ken Livingstone, the new Mayor of London, is now challenging the Government’s plans in court.

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