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1 Eur. Pub. Private Partnership L. Rev. 24 (2006)
The Private Finance Initiative (PFI) as the Prelude of Public Private Partnerships (PPPs)

handle is hein.journals/epppl1 and id is 28 raw text is: 24 1 The Private Finance Initiative (PEI) as the Prelude of Public Private Partnerships (PPPs) EPPPL 112006 The Private Finance Initiative (PFI) as the Prelude of Public Private Partnerships (PPPs) Christopher Bovis* I. The emergence of the Private Finance Initiative The Private Finance Initiative (PFI) represents a process of public sector management which envis- ages the utilisation of private finances in the deliv- ery of public services and the provision of public infrastructure. The Private Finance Initiative has arrived in times when the role and the responsibil- ities of the state are being redefined and also has been seen as part of a process of sliming the state down to a bare minimum of fiscal responsibilities towards the public. The state then assumes a regu- latory role in the market place where the private sector is elevated to a service deliverer. The princi- pal benefit from such exercise could be that the public sector does not have to commit its own, often scarce, capital resources in delivering public services. Other reasons put forward for involving private finances in delivering public services include quality improvement, innovation, manage- ment efficiency and effectiveness, elements that are often underlying the private sector entrepreneur- ship. Consequently, the public sector would receive value-for-money in the delivery of services to the public, whereas it could also be maintained that through this process the state manages in a better way public finances, to the extent that capital resources could be utilised in priority areas. When the Private Finance Initiative was launched in 1992, it did not receive the envisaged response from either the public or the private sectors. The initial approach to privately financed projects by the public sector represented a disguised tendering for their financing, and as such it revealed a num- ber of procedural and commercial inadequacies in the whole process. Policy makers incorrectly assumed that the mere private financing of projects could enhance their quality and value-for-money, as well as transform the often ill-fated traditional pub- lic procurement process into a supply chain system of advanced structure and entrepreneurial flair. The Private Finance Initiative was wrongfully conceived as a panacea for the limitations of the traditional public procurement process, which was blamed for inefficiencies and poor value-for-money. A number of reasons which have been put forward include inter alia poor specification design, wrong contrac- tual risk allocation, poor control systems for con- tractual performance and bad planning and deliv- ery processes. In principle, privately financed projects destined for the public sector have been an option in the UK public procurement process since the eighties, where the government, with great deal of caution, allowed the conclusion of a limited number of con- tracts. The government applied the so-called Ryrie Rules in the process of allowing private finances to be used in public projects, subject to two strict con- ditions. The first one concerned the cost-effective nature of the privately financed delivery in com- parison with a publicly funded alternative. To reach such a conclusion, contracting authorities should have established a public sector comparator, where- by the privately financed delivery model could be tested and compared against the traditional pub- licly funded one. The second condition for the gov- ernment to give clearance for a privately finance project related to the compulsory substitution of publicly funded schemes with the privately funded ones. In other words, private finances were con- ceived as an exclusive alternative method in deliv- ering public services and not as a complementary one. Meeting the two conditions of the Ryrie Rules was not an easy exercise for public authorities, par- ticularly in attempting to establish the cost-effec- tive nature of a privately financed project versus a publicly funded alternative and its value-for-money. Quite often the rationale behind such comparisons was founded upon unsound grounds. For example, in order to achieve a meaningful comparison, the * Prof. Dr. Christopher Bovis is Professor of Law and holds the Jean Monnet Chair in European and Business Law at Lancashire Law School, University of Central Lancashire.

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