Will Carillion collapse and NAO report end PFI?
Double blow could change attitudes to PFI projects. John Tibbitts explains.
Despite what you may have heard, January’s National Audit Office (NAO) report on PFI and PF2 doesn’t actually form a view on the value for money of PFI, or make suggestions on how it might be improved.
However, the demise of Carillion, a major PFI investor, constructor and operator, has been a gift to those who oppose privately-financed public infrastructure.
The government has rightly initiated investigations into the Carillion collapse, but so far has remained largely silent on PFI – and PF2, its “reformed” version. The reason for this is that it is a useful procurement process for the government.
The Infrastructure and Projects Authority has identified the need for more than £300bn of investment in the five years to 2020-21. Some of this will come from tax receipts and state borrowing but a significant proportion will be privately financed.
Opponents of PFI argue that no risk is transferred to the private sector. Well, the £375m Carillion had to write down on recent PFI projects looks like a fairly major risk transfer to the company’s shareholders. The failure of another PFI specialist Jarvis was also partly due to it underestimating the risk involved.
So despite its flaws, PFI does work from a government perspective. The bigger question now is whether the industry still has the enthusiasm for it. Without guarantees from the construction and FM companies that underpin the whole project finance structure, and provide the upfront investment, PFI schemes won’t get off the ground.
Nobody starts off with the intention of replicating Carillion’s mistakes, but can those signing off PFI bids really be sure that all the risks are well understood and properly priced? Anyway, how do you price in risk to cover a potential loss of £375m?
In the past, there has always been at least one company prepared to take a short-term view on risk. But with the lessons from Carillion fresh in the mind, many contractors may adopt a more cautious approach.
John Tibbitts was managing director of Kier Project Finance and is now an independent consultant