Issues
FINANCIAL
The financial procedures surrounding PFI contracts have frequently come under close scrutiny. The PFI process has established disciplines that have proved increasingly successful both financially and in defining exact public sector requirements. In recent years, risks have become better understood and fees have been streamlined. The construction industry makes an average return of about two per cent of turnover on each project. Any increase in project costs is borne by the private company.
Below are key points relating to some of the financial aspects of PFI.
- The public sector has always worked with organisations that make profits in order to fulfil policy commitments. Building companies still make a profit when the public sector builds assets from public funds.
- The Government can borrow more cheaply than the private sector, but determining value for money is not simply about comparing interest rates. Any additional costs of borrowing are typically more than offset by:
- The private sector taking on the risk of construction costs
- Project delivery on time and within the budget
- Discipline from due diligence by lenders
- The private sector’s ability to innovate and make more efficient use of resources.
- If the contractor incurs losses because of complications on the building, no extra money is forthcoming. That is one of the great benefits of PFI to the public sector.
- All PFI schemes now include legislation dealing with the profits gleaned from refinancing. Under a new voluntary code of conduct published in October 2002 by the Office of Government Commerce (OGC), the public sector will benefit from a 30% share of any refinancing gains in all similar early-signed schemes.
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Issue Paper 3 - Financial
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