UK MOD Private Finance Initiatives (PFIs)

Publication date: 2007

A Private Finance Initiative (PFI) is a form of Public-Private Partnership (PPP). PFI involves public sector organisations such as the UK Ministry of Defence (MOD) commissioning a private contractor to provide a service for an agreed period of time. The private contractor takes responsibility for the required capital investment and is paid by the public sector organisation over the entire period of the contract. In effect, the public sector organisation leases the service from the contractor. Typically, but not necessarily, a PFI arrangement involves the contractor borrowing capital from a third party financial institution. MOD policy demands that all projects considering PFI need to develop a "public sector comparator" to show the cost of meeting the requirement by non-PFI means.

The UK government Trade Partners UK website provides the following basic explanation of Public-Private Partnerships (PPPs):

PPPs are an increasingly popular method of developing infrastructure and modernising services based upon a partnership between the public and private sectors. The attraction of forming such partnerships lies in the ability to mobilise more capital than that purely held in the public account and to use private sector expertise to help manage project expenditure more efficiently. Governments can bring private sector into the modernisation and management of projects, while remaining responsible for public interest issues and ensuring delivery at specified service levels. In short, PPPs enable governments to meet demands for the development of modern and efficient services and provide value for taxpayers.

The following sections are adapted from the UK MOD Acquisition Management System (AMS):

Public Private Partnership (PPP) is one of the central strands of the Government’s strategy to modernise public services under the Better Quality Services initiative. The PPP programme encompasses a number of initiatives such as the Private Finance Initiative (PFI), Partnering, the Wider Markets Initiative and Outsourcing. PFI is at the core of the PPP programme and can involve the private sector in creating (or buying) a new physical asset and the selling of a range of services to the Department built round the asset over an agreed period of time.

MOD Ministers have endorsed the use of PFI to provide services throughout the Department. Only if PFI has been demonstrated to be unworkable, inappropriate or uneconomic should projects consider using the MOD’s own capital funding resources.

PFI aims to provide better value for money by allowing MOD to focus on its core tasks, while benefiting from additional capital investment. PFI offers the potential for greater risk transfer (including demand, construction and residual value risk) to the private sector, and is likely to involve rigorous due diligence scrutiny of the project by banks. PFI allows the private sector the opportunity to show innovation in the method of service delivery and places strong incentives on the contractor to deliver the service to time, cost and performance targets, as well as affording scope for the generation of 3rd party revenue.

PFI involves contracting for a service, with service-based payment mechanisms, where substantial capital investment is needed in an asset essential to deliver that service.

For all types of PPP customer awareness and understanding needs to go beyond pure technical knowledge. Management structures and incentives at all levels need to be established such that the relationship is constructive and predisposed to solve problems. Nevertheless, there is no substitute for a clear and robust contract that specifies outputs, risk apportionment, and processes for change and dispute management.

For a PFI project, MOD should specify its needs in output terms, based on the required capability rather than a pre-determined technical solution. Bidders will then have the maximum possible flexibility to adopt innovative approaches or introduce practices from other sectors of industry. The procurement process for a PFI project can be a substantial task for both the MOD and bidders, with a consequent need for adequate resources. PFI is demanding but has realised savings of up to 40% in forecast costs compared with other forms of procurement.

The following are broad indicators of the scope for PFI in a project:

• A requirement for significant capital investment now or in the future
• A substantial element in the requirement can be configured as a service
• Scope for innovation in the delivery of the service
• MOD risks which could be better managed in the private sector
• Scope for long term contracts

Projects with scope for third party revenue or for the transfer of demand risk to the private sector particularly suggest themselves for PFI, but these are not mandatory requirements for a PFI deal.

Source: Lancaster University
Publication date: 2007

Related Defence Supplier Guidance

• UK MOD Defence Industrial Strategy

To find out how your company can successfully compete for procurement opportunities with the UK MOD, contact Jeffrey Strategic.