UK PRIVATE FINANCE INITIATIVE

UK Private Finance Initiative

UK Private Finance Initiative

The government claims that the extra costs of the private finance initiative (PFI) are offset by savings that are achieved by private sector managers. These savings are said to be the result of PFI projects coming in on time and to budget compared to conventional procurement. Cost and time overrun data play a crucial role in this argument. The Treasury claims that evaluations show that 88% of PFI schemes are delivered on time, whereas 70% of non-PFI projects are delivered late and 73% over budget. These data are cited in support of PPP policy both at home and abroad and are incorporated into government guidance. Treasury guidance requires that estimated costs of non- PFI schemes are adjusted and uplifted by as much as 24% to take into account the risks of cost and time overruns. The adjustment is intended to counter 'optimism bias', the tendency among project appraisers to underestimate the likelihood of schemes going over budget or being delivered late. The UK Treasury cites five research studies as the source of the cost and overrun data. Our evaluation of the five reports highlights the absence of any evidence to support the Treasury's claim and policy guidance.

Of the five reports:

two were conducted by the National Audit Office (NAO) and were surveys and consultations with project managers. They do not have any primary data on cost and time over runs (Modernising Construction (2001) and PFI Construction Performance (2003));

athird study, cited by the NAO, was undertook by a private sector body, Agile building Initiative. It was conceived to develop a procedure not to evaluate cost and time presentation and has no data on cost and time overrun performance;

the Treasury's own report comprises no data to consider the cost and time overrun assertion and its methodology is not in the public domain;

the fifth study was undertook by Mott MacDonald, a company which actions as a mechanical consultant on PFI deals. The report has no data to support Treasury guidance although it is the only comparative study of PFI versus conventional procurement.

Numerous flaws in study design and methodology lead to sample and measurement biases that render the study data uninterpretable:

Although 500 PFI deals had been signed at a value of £28 billion, the Mott MacDonald sample is based on only 11 PFI schemes and 39 non-PFI schemes. There are too few cases to compare cost and time overruns in the procurement routes;

conventional procurement is over-represented by unusual and atypical schemes whereas all high profile IT and other failures are excluded from the PFI sample;

PFI cost and time overruns are measured at a much later stage in the procurement process than non-PFI, thereby wrongly inflating non- PFI costs in comparison with those of PFI;

the conventionally procured sample includes projects from much earlier guidance periods than the PFI sample and so does not reflect recent improvements in performance that have been achieved in all types of procurement.

Although 677 PFI tasks have been accepted or accomplished ...