VALUE FOR MONEY IN PFI PROPOSALS: A COMMENTARY ON THE UK TREASURY GUIDELINES FOR PUBLIC SECTOR COMPARATORS

Abstract

The Private Finance Initiative (PFI), introduced to Britain in 1992, has become a major means of procuring public sector infrastructure. It involves long‐term contracts whereby private sector suppliers construct and own capital assets and provide services for which they are paid on the basis of availability or use. This paper focuses on the early stages of a PFI procurement, the decision to use the PFI rather than any other form of procurement. In 2004 and 2006, the UK Treasury issued new Guidance as to how this should be done. There are two stages to this Guidance: qualitative and quantitative assessments. This paper comments on some of the key issues in the quantitative assessments: the treatment of risk, of residual and life‐time costs, of tax, of rates of return and of the appropriate use of discounted flow techniques when finance is a constraint for an investing agency.

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