PFI is probably one of the most controversial subjects in this country today. PFI arrangements have taken a lot of criticism, perhaps undeservedly so, often from people who don't necessarily understand what they are and how they work.
A lot of this stems from the fact that earlier PFI contracts were subject to a number of flaws or have suffered from a breakdown in communication between client and supplier, but it is beyond the scope of this article to debate the reasons for successes and failures of PFI projects in the UK (incidentally, in Australia and Canada PFI has been received much more positively).
The UK government has now pulled the plug on new PFI projects, so we won’t be seeing any new ones for a while, but there are still plenty of existing PFIs that will be around for a long time yet, so it’s important to understand how they work.
Let’s clarify exactly what PFI actually is.
In a nutshell
PFI stands for Private Finance Initiative. It presents a model which allows the government to carry out large scale construction and infrastructure projects without having to make massive up-front payments by contracting an organisation to design, build and manage facilities for a long-term, fixed amount of time, spreading the cost over many years (usually over decades).
Typical PFI projects include schools, hospitals and prisons but can also be used for other government buildings including office accommodation.
How does it work?
When the government announces a PFI tender, the contract will be bid for by a number of Joint Ventures (JVs). These JVs will usually consist of a construction firm, a facilities management firm and a finance house.
The winning bidder will then be contracted to design and build the facility to the government’s specifications. The JV will finance the design and build of the facility themselves (hence including a finance house) meaning the government does not need to make huge up-front payments for new buildings.
What’s in it for the JV organisation?
The JV makes it’s money back over an extended period of time through a monthly service charge, which includes ongoing management of the property (which is where facilities management comes in).
A PFI contract can last for as long as three to four decades and the service charge will include interest payments, so the value of a PFI to the JV can be many, many millions of pounds.
What’s in it for the government?
PFI allows the government to spread the cost of infrastructure investment over a 30 to 40 year period, rather than having to make a large investment up-front.
It also gives them the guarantee that there will be a facilities management provider available throughout the course of the contract to manage the buildings and keep things running efficiently, without having to go through time consuming and expensive tender processes.
There are many public buildings, particularly schools and hospitals, which may never have been built if it weren’t for the ability to utilise PFI.
What are the drawbacks?
The idea behind PFI is sound, but it’s not all plain sailing. There are drawbacks for both the government and the JV organisation:
- Long contract lengths mean it is harder for the government use the buildings to make efficiency cuts, often having to find cost savings elsewhere (e.g. reducing staff costs through redundancies and pay freezes)
- Unsurprisingly, PFI works out more expensive for the government in the long run. There will always be a trade-off between spreading the cost over the long term and the total amount paid out directly.
- For the JV organisation, entering the market for a PFI contract can be an expensive and risky business. Simply bidding for a large scale PFI can cost millions, with no guarantee of winning. Even after a successful bid, the JV then shoulders all of the up front costs for design and build, along with the running costs once the building is operational. It can take many years for a PFI to break even.
- Often a lack of understanding of PFI can can cause friction between client and JV. Some PFIs are notoriously difficult to manage from a customer relationship point of view.
So there you have it – the basics of PFI.
The model has been refined over the years since it was first introduced. Initiatives such as PPP and PF2 have sought to spread the risk more evenly between clients and JVs, but the basic premise remains the same.
IWFM (BIFM) Qualifications
This article relates to the following IWFM (BIFM) Qualification Units:
- IWFM (BIFM) Level 3 in Facilities Management
- FM3.01 Introduction to Facilities Management
- FM3.03 Customer and Stakeholder Relations in Facilities Management
- FM3.04 Specification and Procurement of Facilities Supplies and Services
- FM3.08 Understanding Facilities Management within the context of an Organisation
- IWFM (BIFM) Level 4 in Facilities Management
- FM4.01 Overview of Facilities Management
- FM4.04 Understanding Facilities Management Support Services Operations
- FM4.21 Understanding Procurement and Contract Management in FM
- IWFM (BIFM) Level 5 in Facilities Management
- FM5.01 Facilities Management Developments and Trends
- FM5.02 Organisational and Facilities Management Strategy
- FM5.21 Managing Procurement and Contracts in Facilities Management
- IWFM (BIFM) Level 6 in Facilities Management
- FM6.01 Strategic Facilities Management
- FM6.05 Strategic Management of FM Support Services Operations
- FM6.12 Procurement Strategy for Facilities Management