A new model for PFI could provide boost for SMEs

30 September 2011

Martin Chambers, Shaylor

Whilst the industry waits for an announcement from the government regarding a new model for private finance initiatives (PFI), Martin Chambers, Framework director at Shaylor, suggests  that the government  should take the  opportunity to create a model  which is much more SME friendly.

There has been lively debate over the much maligned PFI after a damming report by MP’s on the Treasury Select Committee said that the initiative was extremely inefficient.  It’s such a pity that it has taken until now for MP’s to recognise what the average man in the street has been saying for years.  Now all that needs to happen is for government to actually make a difference! 

A review is under way to try and find significant savings, some £1.5bn from current projects and a new code of conduct for PFI contractors is also being progressed.

The present unwieldy, expensive and slow moving model clearly has potential to be more efficient but it does also favour the largest firms and any review should also consider this aspect as there are benefits to be gained from creating a system that is more SME friendly.  Government should start to heed the words of its own construction advisor, Paul Morrell, and create competitions where there is a presumption that the contract will go to the smallest business that is capable of successful delivery.

One of the biggest problems arising from how the system is currently set up is that it favours what I would describe as ‘a best average outcome’.  A PFI contract has several different elements typically, design and build, FM and finance, which are quite diverse.  Different companies will have specialisms in each of these elements but not necessarily in all of them and will bring on board partners to provide the whole package.

A PFI project will therefore usually be won by the best average submission as the likelihood of getting the best of each of the different elements of the contract in one tender is highly unlikely.

A new model that is initially broken up into the specific segments that cover the separate areas of expertise and then comes together in an ‘arranged marriage’ is where I believe the answer will ultimately lie.  This would allow the client or the government to capitalise on the ‘marriage value’ created by it bringing together the best offer for each segment

The other aspect which should be addressed is taking what is perceived as the greatest area of risk, the design and construction part of the contract, away from the institutional finance market.   If a new model had this element as a separate entity then it could be financed by the government.  This way government would become the short term funder and be able to recycle its funding to the next project by placing the long term finance with the institutional investment market, once the scary design and build risk items have been overcome.  . 

Breaking up the overall requirement this way will also make it easier to shorten and streamline the current extraordinarily expense process which is the biggest barrier to SMEs getting involved. The time and expense involved in getting though the various stages of the tender process for many projects are just not within the reach of most medium sized contractors.

Currently PFI projects can take years to procure and those involved can spend millions on responding to the brief, preparing their tender and going through endless interviews and clarifications. 

New ideas have been offered from the industry, the infrastructure investment and management vehicle (IIM) does offer a new approach that has some merit.  In Scotland they have been using a non-profit distribution model but this type of model only really addresses the excess profits issue and does not offer any new opportunities to introduce SMEs into the process.

The government has pledged to create a procurement system that is fairer for SMEs   so it should not miss this opportunity to create more opportunities as they revise the PFI model.

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