A COMPARISON OF PFI, BOT, BOO, AND BOOT

PROCUREMENT ROUTES FOR INFRASTRUCTURE

CONSTRUCTION PROJECTS

R. Akbiyikli, D. Eaton
Research Institute for Built and Human Environment
University of Salford, Salford M7 1NU
E- mail: [email protected]

ABSTRACT: The emergence of public-private sector initiatives, such as DBFO, BOT, BOO,
BOOT for procuring infrastructure facilities provides governments with option of satisfying
their infrastructure needs and demands by alternative means. Generally, such means involve a
user-pays concept, which invariably can be implemented by governments, yet many
governments have preferred to execute the concept through the private sector so as to minimise
their financial liability (Russell and Abdelhamid, 1997). The procurement of infrastructure
projects using those methods requires both the public and the private sectors to change their
existing mindsets and adopt new skills, roles, responsibilities and risks so that all the phases of
a project’s life-cycle can be managed effectively. This article will study and compare these
concession forms and will draw conclusions for infrastructure projects.

Keywords: Concession, Infrastructure, Private Project Finance, Procurement.

1.0 INTRODUCTION

There is a widespread assumption and believe that the public sector is responsible for delivery
of basic services through infrastructure construction is deeply anchored in many countries
allover the world. But there are different methods by which these services are created,
procured and delivered.
There is a broad range of options for involving the private sector in the financing,
construction and operation of infrastructure projects traditionally the domain of the public
sector.
In Fig.1 it is arrayed different procurement routes including the public-private
partnership approaches across a spectrum. At one end of the spectrum, the public sector
retains all responsibility for financing, constructing, operating and maintaining assets,
including the responsibility for assuming all associated risk. At the other end of the
spectrum, the private sector assumes all these responsibilities. The vast majority of the
public-private approaches fall in the middle of spectrum with risks and responsibilities
shared between parties in accordance with their ability and strength.

505
Public Private
Responsibility Responsibility

Traditional
Public BOT BOOT DBFO BOO
Procurement

Public – Private Partnership

Fig. 1 Schematic scale of the public procurement classification

(Adapted from European Commission, 2003)

The public-private partnerships are mainly driven by limitations in public funds for
investments but also by efforts to increase efficiency of spending and the quality of public
services. The ultimate purpose of the collaboration between public and private sectors is
added value; a qualitatively better product for less cost, better accountability and
promotion of private sector innovation.
The emergence of public-private sector initiatives, such as Build-Operate-Transfer
(BOT), Build-Own-Operate-Transfer (BOOT), Design-Build-Finance-Operate (DBFO)
and Build-Own-Operate (BOO) for procuring infrastructure facilities provides
governments with option of satisfying their infrastructure needs and demands by
alternative means. Generally, such means involve a user-pays concept, which invariably
can be implemented by governments, yet many governments have preferred to execute the
concept through the private sector so as to minimize their financial liability (Russell and
Abdel-Aziz, 1997 in Confoy et al, 1999).
The procurement of infrastructure projects using those methods requires both the public
and the private sectors to change their existing mindsets and adopt new skills, roles,
responsibilities and risks so that all the phases of a project’s life-cycle can be managed
effectively.
Each of the above mentioned concession form in turn is examined.

2.0 CONCESSION FORMS

Build-Operate-Transfer (BOT)

BOT is a private sector participation model in which a project company (Promoter) is

established to finance, design, construct and operate a facility for a concession period before it
is transferred to the government (Özdogan and Birgönül, 2000). Project sponsors arrange
necessary financing for the realization of the project through equity contributions and loans
(debt service). The BOT entity undertakes financing, design and construction as well as
operation and so the Client (Principal) is taking no direct cost risk other than the possibility
that the facility does no meet its needs or that the concession agreement is unsatisfactory
(Smith et al, 1994 in Walker and Hampson, 2003).
Financing of BOT projects is different from conventional systems because they are
financed on a project finance basis with no or limited recourse, which means that the
parent companies of project company members do not incur liabilities on their balance
sheets, and only the revenue generation capacity of the project, serves as a guarantee for
the lenders. Non-recourse financing is viable only when a project clearly is capable of
generating revenues and the lenders can be satisfied with the cash flow of the project a
unique guarantee for the repayment of the debt service.

506
 The project company has responsibility for all contracts including the construction
contract. After the construction period is over, the facility is operated by the project
company and services are either bought by the government (in case of energy projects) or
sold to the public (in case of toll roads). The operation should be long enough to cover
debts, expenses, equity contribution and an agreed profit through the collection of toll or
tariffs. At the end of the concession period, the facility transferred to the government free
of charge and in good operating condition.
The acronym BOT was first used in the early 1980s by Turkey’s Prime Minister Turgut
Özal (Grimsey and Lewis, 2002). The first project to be announced as an official BOT
project was Akkuyu nuclear power project in 1984. Officially, the Turkish government had
two main reasons for trying this approach:
• The wish to have a single organization responsible for initiating and building the
project and the belief that there might be efficiency gains from having the project
performed by the private sector;
• A wish for foreign investment to be brought into Turkey without upsetting borrowing
restrictions.
Even though more similar projects were proposed in Turkey, progress was very slow and
eventually the project was abandoned (Morris, 1994; Lam, 1999).
According to Özdogan and Birgönül (2000) the major objective of the Government in
the implementation of BOT model is the realization of urgent infrastructure projects with
minimum possible financial burden and without affecting its minimum borrowing capacity.
In their research Birgönül and Özdogan (1998) of the Turkish BOT projects they list the
following as the major reasons of low realization rate of BOT projects in Turkey:

1. Unwillingness of the Government to provide guarantees against country risks;

2. Lack of adequate legislation;
3. Inexperience of the Government in packaging BOT projects;
4. Ineffective tendering and award mechanism; and
5. High level of bureaucracy resulting in delays.

BOT requires that contracted parties must accept the conventional wisdom that risk should be
assumed by the party within whose control the risk most lies. The major function of the BOT
arrangement is, therefore, to recognize and provide a mechanism for the assignment and
management of those risks (Walker and Smith, 1995).
The BOT project procurement procedure starts with the Government. The Government
usually commissions a team of leading engineering, financial, legal and environmental
consultants to conduct a multidisciplinary study, in order to assess a project’s suitability for
BOT type procurement. If found feasible, the Government prepares a Project Brief as part
of the tender documents to:
1. Explain the Government’s general requirements with respect to the project and
concession, and to provide relevant information;
2. Provide guidance in the preparation of tenders and explain the tender evaluation
criteria; and
3. Set out in detail the Government’s requirements in design, construction, operation
and maintenance (Lloyd, 1996; Zhang & Kumaraswamy, 2001a in Akintoye et al,
2003 p.275).

507
The principal tender evaluation in selecting BOT concessionaire includes:
1. The level ad stability of the proposed toll regime;
2. The proposed methodology for toll adjustments;
3. The robustness of the proposed work program;
4. The financial strength of the bidder and its shareholders;
5. The structure of the proposed financing package;
6. The proposed corporate and financing structure of the franchisee;
7. The quality of the engineering design, environmental issues and construction methods;
8. The ability to manage , maintain and operate effectively and efficiently; and
9. Benefits of the Government and community (Kumaraswamy and Zhang in Akintoye et
al, 2003 pp.263-28).
Phases of a typical BOT project according to Tiong and Alum (1997) is given here below.
Phases the Promoter must go through:
1. Pre-qualification;
2. Tendering; and
3. Detailed negotiation and selection.
Evaluation of proposals:
1. Conceptual proposal during pre-qualification;
2. Evolving to the conforming proposal at tendering stage (if Promoter is invite to
tender); and
3. Winning proposal after detailed negotiation in the credit structure and the security
package (if the Promoter is short listed).

In Fig.2 below phases of a typical BOT project is shown.

Pre-qualification Tendering Detailed negotiation and selection

Conceptual Phase Conforming Winning Credit Structure &

Proposal Proposal Security Package

Contract
Award

Fig. 2 Phases of a Typical BOT project

(Source: Tiong and Alum, 1997)

Build-Own-Operate-Transfer (BOOT)

This concept according to according to McDermott (1999) was established more than a
century ago to construct canals and railways, was sought and encouraged by governments as a
means of obtaining private sector finance for projects, such as infrastructure projects, which
in modern times have been a drain on the finances of the public sector.
Merna and Smith (1994) define a BOOT project as,

508
 ‘ A project based on the granting of a concession by a Principal, usually a government, to
a Promoter, sometimes known as the concessionaire, who is responsible for the
construction, financing and operation and maintenance of a facility over a period of the
concession before finally transferring the facility, at no cost to Principal, a fully
operational facility. During the concession period, the Promoter owns and operates the
facility and collects revenues in order to be able to repay the financing and investments
costs, maintain and operate the facility and make a margin of profit’.

Barnett (1997) provides a comprehensive definition of BOOT as,

‘Government granting to a private sector organization a concession of franchise to build

a specific facility, to own it for a specified period, to operate it and to take the revenue
from it, and ultimately to transfer it back to the Government’.

McDermott (1999) stated that the reliance on a future stream of income as a reward to the
investors led the BOOT procurement to be advocated mainly for schemes for which there was
a clearly defined income source, for example a tolled road, bridge or tunnel. However, Merna
and Smith (1991) argued that it is appropriate even where there is no direct revenue source,
such as public sector schools and hospitals and sheltered housing.
Tiong (1990) has described a typical contractual structure for a BOOT project.
Normally at the centre will be a joint venture or project company legally constituted in the
host country. The project company will need to establish contractual relationships in the
length of the concession. In addition to the concession agreement with the host
government, loan agreements with the banks, shareholder agreements with investors,
offtake agreements with the users of the facility, operation agreements with the operators
and construction contracts with the constructors all need formulating.
The vehicle for BOOT project as mentioned above is the project company (Promoter)
which is a consortium. The consortium has the responsibility to construct, operate and take
revenues from the running of the amount borrowed has been repaid or when the concession
period expires (Confoy et al in Ogunlana, 1999).

509
A typical structure of a BOOT project is shown in Fig. 3 below.

Government
(Principal)

Concession
Agreement

Concession
Supply Company Offtake
Suppliers Contract Contract Users
(Promoter)

Loan Operation
Lenders Agreement Contract Operator

Shareholder Construction
Investors Agreement Contract Constructors

Fig 3 Typical Structure of BOOT project

(Source: McCarthy and Tiong, 1991)
Build-Own-Operate (BOO)

There are many similarities between BOOT and BOO concessions. In the BOO concession
arrangement ownership does not generally transfer back to the government at the termination
of the concession agreement.
The major difference between financing projects of BOOT/BOO arrangement and the
more conventional approaches is that lenders have only the project’s expected cashflows to
indicate its viability (Woodward, 1995).
The structure of a BOO can be the same as the one shown in Fig.3 above. The only
major difference relates to the offtake contract. The BOO projects employ a particular form
of structured financing. Such projects are complex by way of number of parties involved
and the corresponding number of contracts, which must all interlock (Confoy et al, in
Oganluna, 1999).
Under a BOO the private sector designs and builds the infrastructure, finances its
construction and owns, operates and maintains it over the concession period. Traditionally
BOO projects provide for the infrastructure to be transferred to the government at the end
of the concession period.

510
3.0 PRIVATE FINANCE INITIATIVE ARRANGEMENTS

HM Treasury (1993) distinguished three types of PFI projects:

3.1 Design-Build-Finance-Operate (DBFO)

In DBFO contracts the private sector provides assets, arranges debt financing from
commercial banks for a high share of the cost of the asset and equity for the balance of the
funding requirement and on- going operation and maintenance services in respect of the assets
but the public sector pays for the asset on completion and for the services when provided. The
private sector gets paid on completion by the banks while the public sector pays a capital
charge over the contract life which is used to repay the banks and to remunerate the equity.
DBFO is an output focussed contract and it sets out a functional specification. In an
output based contract specification the public sector specifies the requirements – the what,
and leaves the private sector to determine and decide the best way – the how, to meet the
specification. This arrangement increases the scope for the private sector to innovate in
designing solutions to meet the output specification.
A DBFO contract is a long-term contract usually entered into between a Government
Agency or Local Authority (public sector) and a Contracting Vehicle – a Special Purpose
Vehicle (SPV) which consists of a design and build (asset) provider (DB) a finance
provider (F) and an operation and maintenance (service) provider (O).
A Special Purpose Vehicle (SPV), a limited liability company, is crated to undertake the
contracted services, to own the assets and to be the contracting party with the public sector.
The SPV enters into the primary contract with the public sector which typically involves
providing both assets and services over the contract duration. The SPV then enters into
matching back-to-back contracts with a construction contractor for the provision of the
built asset often on a fixed price contract, and an operation and maintenance contractor for
the provision of services. Once the back-to-back contracts are established, the funding
requirement of the SPV can be determined. The SPV funding requirement is met with a
high proportion of project debt, up to 90%, and the balance of the funding is achieved as
equity or subordinated debt by the SPV shareholders. The public pays no up-front
payments during the construction of the asset. All the design and build expenses are borne
by the private sector and through debt and equity financing. The financial institution (bank,
insurance company, etc.) makes the monthly payments to the works contractor as per the
financial agreement between SPV and the lenders. These payments are drawdown from the
loans given to SPV. The public sector starts its payments to private sector if the
performance of the services specified in the Output Specification of the public sector is
satisfied. The project debt advanced to the SPV depends for the repayment on the
payments made to the SPV by the public sector.

The banks and the equity providers put the SPV in funds to pay the asset provider on
completion the asset and the service provider as the services are provided. The public sector
contract with the SPV finances an annual capital charge to pay over the contract life for the
asset and an annual operation and maintenance (O&M) charge to pay the service provider.
The total cost to the public sector of he DBFO contract is the present value of these contract
payments.

The terms of contract between the SPV and the public sector are set to cover the total costs of
the SPV, including the capital charges and service and transaction costs (legal and financial
advisory fees).

511
The contract with DBFO Company in road projects determines (British Highway Agency,
1997):

• The outline road design;

• The core client and environmental/planning requirements forming the output
specification;
• The operational performance of existing and new roads consequent upon or affected
by the project;
• The requirements for the operation of construction works and maintenance;
• Change mechanisms to deal with project variations;
• Default and no-default events;
• Performance guarantees that are released on the satisfactory completion of the
construction phase covered by the guarantee;
• Step-in rights.

It also details payments to the DBFO Company based on volume and type of use coupled to
the contract terms on lane availability and safety performance over the concession period.

The objectives for utilising DBFO in road projects in the UK (ibid; House of Commons –
Forty-Seventh Report, 1998):

• To ensure that the project is designed, maintained, and operated safely and
satisfactorily so as to minimise any adverse impact on the environment and maximise
benefit to road users;
• To transfer the appropriate level of risk to the private sector;
• To promote innovation, not only in technical and operational matters, but also in
financial and commercial arrangements;
• To foster the development of a private sector road-operating industry in the UK; and
• To minimise the financial contribution required from the public sector.

The primary lessons learned from the first eight DBFO projects completed in the UK (British
Highway Agency, 1997):

• DBFO contracts have accelerated the introduction of cost efficiencies, innovative

techniques and whole-life cost analysis into the design and construction of road
schemes and in the operation of roads;
• The full potential of efficiencies, innovation and whole- life cost analysis inherent in
the PFI is likely to be fully unlocked only when the private sector is involved in the
outline design of the road scheme, which they are then obliged to construct, operate
and maintain under a DBFO contract. This requires the private sector to assume some
planning risk. Some of the DBFO projects announced introduce the concept of
planning risk and will test the proposition that this will deliver better value for money
;
• The risk allocation on DBFO contracts has been encouraging. Two areas where
transfer of risk to the private sector has delivered good value for money are protestor
action and latent defect risk. The Agency will continue to look for risk transfer to
ensure that DBFO contract remains off-balance sheet;

512
 • DBFO contracts have delivered Value for Money, VFM. Cost savings , compared
with the Public Sector Comparator, PSC, have ranged from marginal to substantial
and the average cost saving is 15%;
• Use of a Model Contract as the basis of negotiation for each DBFO contract saves
bidders time in preparing their bids and provides significant efficiencies for the
Agency, both in negotiation and in operating the contracts. The updating of the Model
Contract is welcome, as it will reflect changes to provisions arising from negotiation;
• Training in negotiation for project teams and dissemination of accumulated
knowledge on DBFOs and the PFI, generally, within the Agency continues to
improve the quality of BFO projects delivered;
• When devising the payment structure, the contracting body should determine what its
objectives are for the service being provided, and the payment mechanism should be
designed to incentives the private sector to achieve those objectives; and
• With eight contracts let and expressions for interest received for further projects, it is
clear that a road-operating industry is developing. The same consortia have appeared
as bidders on projects within each group.

Contractual Model of PFI

The general mechanism and contractual structure of PFI project is shown in Fig. 4

GRANTING
AUTHORITY

Concession Step-in
Agreement Agreement
Shareholder
Agreement
Loan
Agreement
SHAREHOLDERS SPECIAL s LENDERS
CONTRACTOR PURPOSE BANKS
OPERATOR VEHICLE LESSORS
(SPV)

Step-in
Construction Agreement
Step-in O&M
Contract
Agreement Contract

CONSTRUCTION OPERATION &

SUB-CONTRACTOR MAINTENANCE
SUB-CONTRACTOR

Sub-contracts Sub-contracts

SUB-CONTRACTORS SUB-CONTRACTORS

513
 Fig. 4 Typical PFI Contractual Structure

The main participants and contracts between parties in a PFI project will now be explained.

All the participants in the PFI procurement of projects have to adjust their approach away
from the traditional contracting strategies to a somewhat wider view. Under PFI the private
sector is no longer required simply to construct an asset but, the private sector are required to
finance, build and operate a particular asset, providing a service to the public sector.
The structure of PFI deals often involves a complex web of contracts, linking a variety
of different parties all with varying interests and involvement in the project (Payne, 1997).
The structure of the Contract will define the basis for the future long-term operational and
managerial relationship between the Authority and the Concession Company-Special
Purpose Vehicle (SPV) (HM Treasury Taskforce, Technical Note 6, 1999).
The public sector changes roles from service provider to service specifier and the
private sector changes from asset provider to a service provider. Service provision for a
30-40 year concession period entails a change in both public and private organisational
cultures. Both public and private have to adjust to the move to the service sector, and to the
commitment to a long - term relationship. Within this organisational structure a partnering
concept is created which provides a framework for the establishment of mutual objectives
among the public and private parties which enthuses good relations, honesty, openness,
trust, integrity and co-operation. This process of partnering in PFI attempts to establish
working relationships among the stakeholders (public sector, construction contractors,
maintenance and operation contractors, investors and finance providers, sub-contractors,
etc.) through a mutually developed, formal strategy of commitment and communication.
The key to success is the effective communication of project objectives by the stakeholders
and it requires a process of change, which must first be brought to the respective
organisations and then incorporated into the team performance of the main stakeholders in
PFI project orga nisation.
The main objective of a PFI is a service provision (de Lemos et al., 2000). The private
sector is not any more in a traditional construction project but moves into a new and
diverse and pluralistic business culture in a consortium. Fig.5 shows project objectives in
PFI projects.

514
 OBJECTIVES LEVEL

STRATEGIC
OBJECTIVES
What the Authority
wants to acieve CORPORATE LEVEL
from long-term
relationship?

FUNCTIONAL
OBJECTIVES
What the project
will do for the COMPANY LEVEL
Authority?

PROCUREMENT
OBJECTIVES
What are the cost,
time, quality and PROJECT LEVEL
certainty required
by the Authority?

Fig. 5 Project objectives of a consortium in a PFI project

Long-term contractual relationships

The PFI Concession Company (Consortium) is an autonomous legal unit. All contractual
relationships of the Concession Company with other parties involved in the PFI have to
provide for the extended life of the contract and establish measures to control it and establish
dispute resolution procedure. The Private sector must adjust their organisational cultures and
structures to a long-term involvement instead of the traditional short-term and related
temporary multi organisations of the construction projects. The Public Sector too must change
its role from service producer to monitor the performa nce and effectiveness of the service.
Grant (1996) found that PPP’s (and therefore PFI’s) are most successful when four pre-
conditions occur, namely:

• The partners are financially strong and organisationally stable;

• The partners are willing to commit their best human resources to the project;
• The project provides opportunities for all partners;
• There is shared authority and responsibility.

The PFI Contracting Parties and their Obligations

A PFI is a free contractual relationship among the parties.

515
The main parties in the PFI contracts are:

• Granting Authority: Is the Public Sector who buys the service. It can be a department
of Central Government, a Local Authority (Council) or a separate legal entity
established under statute (e.g. NHS Trust). The Authority is not concerned with the
means of production of any activity to produce any particular asset. The Authority
must prescribe clearly and unambiguously the outputs of that activity. Although the
Granting Authority is purchasing a service, it is very much concerned with the
physical asset being created because at the end of the concession period, the risks and
responsibilities of ownership will necessarily revert to the Granting Authority. The
Awarding Authority’s objectives will always be: (1) to transfer risks to the private
sector, (2) to achieve VFM for any public sector contribution, (3) ensuring early
completion of the project, (4) maximising its future flexibility through the contract, (5)
ensuring ongoing service provision to the required standards, and (6) ensuring that the
project is off balance sheet for the Granting Authority.
• Contractor: Is the Private Sector party who supplies the service. It is designated as
SPV (Special Purpose Vehicle), which is an autonomous legal entity totally
independent of the companies that own it. SPV is the only entity that can establish
contracts with the Granting Authority. The SPV’s objectives are: (1) minimizing bid
costs, (2) delivering profit, (3) risk transfer to sub-contractors and third parties
(insurers), and (4) limitation of recourse.
• Design and Build Contractors: Is the Private Sector entity performing the
construction/development obligations.
• Operations, Maintenance and Service Providers: Is the Private Sector entity
performing the operations/maintena nce services.
• Equity Investors and Lenders: Are those providers of finance to the Contractor under a
financing agreement. There is no shareholder or affiliate of any shareholder in the
SPV. They are financiers. The key objectives of equity investors and lenders are: (1)
ensure that as many as possible of risks undertaken by SPV passed down to sub-
contractors of acceptable financial standing, (2) limiting certain risks, that cannot be
passed down to others, in SPV, and (3) appoint technical experts to monitor the project
through each of its phases to take control early when things go wrong.

3.2 Joint Ventures (JVs)

Joint ventures are arrangements where the public sector provides the PFI contractor with a
subsidy to reflect the social benefits of a project not reflected in cash flow. Joint Ventures
involve a partnership whereby a Public Authority may not take more than 50% of the capital
funding. The public and private sectors will receive a proportional share of any profit. The
revenue comes principally from third parties. These projects have a positive cost-benefit
analysis, but would not be financially viable if funded by private finance alone (congestion
relief roads are typical examples).

3.3 Financially free-standing projects

Financially free-standing projects are delivered by private sector contractors who will finance
the whole project by recovering their costs and profits from governmentally agreed ser/toll
charges. The public sector plays a facilitating role but no public money is involved. The
public sector’s role is:

516
 • To plan, license and award work concession;
• Assume a statutory role to ensure public interest is being maintained.

Toll bridges are typical examples.

A summary of the private sector involvement in concessions is given in Table 1 below.

Design Build Finance Operate Own Transfer Payment

Mechanism
DBFO

Design Yes Government

Build Yes Yes Yes Yes In Yes pays only
Finance Fixed for services
Operate Term delivery

Third Party
Users +
subsidies
Joint from
Venture Yes Yes Partially Yes Yes Government
for social
services

Financially
Free Yes Only
Standing Yes Yes Yes Yes In Direct
Objects Fixed By
Term Users

Table 1: Private Sector and Concession Arrangements

4.0 THE CURRENT STATE OF PFI IN THE UK

PFI has been widely developed in the UK. New facilities in schools, prisons and roads have
delivered substantial benefits, but UK policy makers are continuing to learn lessons in how
PFI can be delivered more effectively.

PFI capital expenditures are an addition to traditional governmental capital expenditure (Kee
and Forrer, 2002). According to Research Paper 03/79 (Allen, 2003), public sector capital
expenditure is projected to rise from £23.0 billion in 2000-01 to £38.2 billion in 2004-05. As
a proportion of Gross Domestic Product (GDP) public capital expenditure will rise from 2.5%
of GDP to 3.4% over this period.
It is expected that the rise in public sector capital expenditure under the PFI will
increase total publicly sponsored capital expenditure from £26.5 billion in 2000-01 to
£42.3 billion in 2004-05 as shown in Table 2.
Departmental estimates of capital spending by the private sector (signed deals) for the
financial years 2003-04 to 2005-06 are shown in Table 3 below.

517
£ Billion
Outrun Projections
2001/02 2002/03 2003/04 2004/05
Total public sector
capital expenditure 23.0 26.0 33.4 38.2
(as % of GDP) 2.2% 2.3% 2.8% 3.1%

Estimated capital
expenditure under PFI 3.5 3.7 4.8 4.1
(As a % of total public 13.2% 12.5% 12.6% 9.7%
capital expenditure)
Total publicly sponsored
capital expenditure 26.5 29.7 38.2 42.3
(As % of GDP) 2.5% 2.7% 3.3% 3.4%

Table 2: Public Sector Capital Expenditure

(Source: Allen, 2003 - House of Commons, Research Paper 03/79)
£ Million
Projections
2003-04 2004-05 2005-06 TOTAL
Education and Skills 0 0 0 0
Health 338 210 89 637
Transport 6,624 552 370 7,546
Local Government 1,940 2,330 2,700 6,970
Home Office 186 150 46 382
Lord Chancellor’s Department 52 6 11 69
Defence 175 0 0 175
Foreign and Commonwealth Office 5 5 5 15
Trade and Industry 6 2 0 8
Environment, Food and Rural Affairs 3 0 0 3
Work and Pensions 14 22 0 36
Scotland 381 330 1 712
Wales 43 34 0 77
Northern Ireland Executive 13 3 0 16
Chancellor’s departments 49 24 11 84
Cabinet Office 12 4 0 16
TOTAL 9,841 3,672 3,233 16,746

Table 3: Departmental estimate of capital spending by the private sector

(Source: Allen, 2003 - House of Commons, Research Paper 03/79)

By November 2003, 617 projects had been signed under PFI with a capital value of over
£56 billion. While there were a few projects in the early 1990s, including a large contract
of £4 billion for the Channel Tunnel rail link in 1996, most ha ve been signed since 1997,
typically at least 70 each year with total value of deals, excluding the Channel Tunnel and
London Underground (LU), in the range of £2.5 billion to £5 billion each year. Overall,
PFI has accounted for about 15% of public sector capital investment since 1996, with the
remainder being carried out through conventional forms of procurement. The annual
number of contracts has fallen from a peak of 113 in 1999 to 43 in 2003. This has been
accompanied by an increase in the average size of the contract, as procurement costs on
smaller deals have come under greater scrutiny (IFSL, 2003). PFI in Government

518
Departments is shown in Table 4 and the largest PFI contracts as a cumulative total
between 1990-2003 are shown in Table 5 below.

Number £ m % share
Transport 44 37,972 66.9
Defence 59 4,011 7.1
Health 152 3,596 6.3
Scottish Executive 29 2,217 3.9
Education 102 2,028 3.6
Home Office 52 1,976 3.5
Work & Pensions 7 961 1.7
Welsh Assembly 17 508 0.9
Northern Ireland Executive 29 395 0.7
Environment 14 1,000 1.8
Others 112 2,060 3.6
TOTAL 617 56,724 100.0

Table 4: PFI in Government Departments (Cumulative Total, 1990-2003)

(Source: IFSL, 2003)

Capital value Government

£ m Department
London Underground (LU) PPP 28,381 Transport
Channel Tunnel rail link 4,178 Transport
National Air Traffic Services (NATS) 800 Transport
Skynett 5 military satellite communications 750 Defence
National police digital radio service 500 Home Office
M6 Toll Road 485 Transport
LU Ltd Northern Line trains 409 Transport
East Sussex & Brighton Waste Management 400 Environment
LU Ltd communications 355 Transport
Second Severn River crossing 331 Transport
Royal Navy Fleet Communications Service 280 Defence
University College London – New hospital 267 Health
Armed Forces Personnel Administration Agency 264 Defence
Section of A1(M) road 245 Transport
Glasgow Schools Project 225 Education
Nottingham light rail 220 Transport
Employment Service IT Partnership 217 Work & Pensions
Defence main building refurbishment 209 Defence
London Regional Transport Croydon Tramlink 205 Transport

Table 5: Largest PFI Contracts of signed deals in the UK

(Source: IFSL, 2003)

5.0 THE FUTURE PROSPECTS OF PFI IN THE UK

In PFI : Meeting the Investment Challenge published by the Treasury on 15 July 2003
(Treasury, 2003) as well as reviewing the progress of the PFI in the UK, the document
outlines the Government’s commitment to the PFI in England to 2005-06 (Allen, 2003;
Jackson, 2004).

519
The future of PFI in the UK seems certain. As stated in Jackson (2004):

‘It is fairly certain that PFI is here to stay, though its precise form will evolve over
time’.

The majority of increase according to the Treasury (2003), on a capital value basis, is
expected in the health and defence sectors in the UK. The Department of Health (DoH)
projects 55 deals by the end of 2005 with an estimated capital value of £6.5 billion while the
Ministry of Defence is expected to sign 14 deals with a similar capital value.
PFI will no longer be us ed for IT projects and it will not be used for projects costing
less than £20 m (Treasury, 2003), because of the high transaction costs.
There is also to be increased investment in secondary schools through programmes such as
the ‘Building Schools for the Future’ programme (Treasury, 2003).
New areas for the PFI will include social housing, urban regeneration, and waste
recycling (Treasury, 2003; Allen, 2003; Jackson, 2004).

5.1 PFI Construction and Operational Performance in the UK

5.1.1 PFI Construction Performance in the UK

Evidence from two studies in the UK about the PFI performance is shown in Table 6 here
below.

PERFORMANCE National Audit Office HM TREASURY (2003)

FEATURES (NAO, 2001)
1. Delivering on time 76% (PFI) 88%
30% (Non-PFI)
2. Delivering to budget 79% (PFI) 79%
27% (Non-PFI)
3. Quality of design The consortia in PFI projects:
Invested in good design and
construction at start of the
contract;
Achieved better quality
buildings and reduction in
maintenance costs while
maintaining the assets to the
standards agreed in the
contract;
Placed more emphasis on
aesthetics of design than
before.

Table 6: PFI Construction Performances in the UK

(Source: NAO, 2001 and HM Treasury, 2003)

520
5.1.2 PFI Operational Performance in the UK

Evidence from the same studies in the UK about the PFI operational performance is shown in
Table 7 here below.

Full assessment of the operational performance of PFI will only be possible at a much later
stage in the contracts.
A NAO (2001) study of 98 projects and HM Treasury (2003) study of 61 projects has
provided initial indications of overall project performance through seeking the view of
public sector PFI managers on achievement of expectations and VFM.

PERFORMANCE National Audit Office HM TREASURY (2003)

FEATURES (NAO, 2001)
1. Achievement of expectations 35% “as expected”
N/A 25% “far surpassing”
16% “surpassing”
2. Value for Money (VFM) 6% “excellent”
46% “good”
29% “satisfactory” N/A
15% “marginal”
4% “poor”
3. Overall performance of the 51% “as expected” or “better”
private sector matching up to 25% “far surpassing”
expectation at the time of N/A 18% “less than expected”
contract close 6% “much less than expected”

Table 7: PFI Operational Performance in the UK

(Source: NAO, 2001 and HM Treasury, 2003)

6.0 CONCLUSION
The authors in this paper attempted to enlighten the innovated public-private partnership type
of procurement approaches for infrastructure projects. It is explained that there are a number
of factors, relating to public sector cash constraints and the underlying principles of these
innovated procurement approaches, which might cause governments to consider the
introduction of these deals.
The principal roles of the private sector in these approaches are to provide additional
capital, to provide alternative management skills, to provide value added to the end user
and the public at large and to provide better identification of needs and optimal use of
resources.
These output-based innovated procurement routes by no means can be seen as a panacea
for a cost cutting or failing government. It has to be remembered that these schemes are
complex to design, implement and manage and should be considered if it can be
demonstrated that they will achieve additional value compared with other approaches.

521
7.0 REFERENCES
Akintoye, A., Beck, M. and Hardcastle, C. (2003) eds, Public-Private Partnerships –
Managing risks and opportunities. Blackwell Science Ltd., Oxford, UK.
Allen, G. (2003), “Private Finance Initiative (PFI)”, House of Commons Research Paper,
03/79, House of Commons Library, London.

Barnett, M. (1987), “Role of the Merchant Banker in Projects”. International Journal of

Project Management, 5(4), pp.197-203.

Birgönül, M.T. and Özdogan, I. (1998), “A proposed framework for Governmental

organisations in the implementation of BOT model” in Proceedings of the 14th ARCOM
Annual Conference, University of Reading, Vol.2, pp.517-526.

British Highways Agency (1997), DBFO – Value in Roads. HIAG J02-7650, Stationary
Office, London.

Confoy, B., Love, P.E.D., Wood, B.M, and Picken, D.H. (1999), “Build-Own-Operate – The
Procurement of Correctional Services” in Profitable Partnering in Construction
Procurement, CIB W92 and CIB TG 23 Joint Symposium, Edited by Stephen O.
Ogunlana, E & FN Spon, London.

De Lemos, T., Betts, M., Eaton, D. and de Almeida, L.T. (2000), “From Concessions to
Project Finance and the Private Finance Initiative”. The Journal of Private Finance, Fall,
pp.1-19.

European Commission (2003), “Guidelines for Successful Public-Private Partnerships”,

European Commission Directorate General Regional Policy, March, Brussels.

Grant, T. (1996), “Keys to Successful Public-Private Partnerships”. Canadian Business

Review, Ottawa, 23(3): pp.27-28.

Grimsey, D. and Lewis, M.K. (2002), “Evaluating the risks of public private partnerships for
infrastructure projects”, International Journal of Project Management, 20, pp.107-118.

HM Treasury (1993), Breaking New Ground: Towards a New Partnership between the Public
and Private Sectors, London.

HM Treasury (1999), Technical Note 6 - How to Manage the Delivery of long-term PFI
Contracts. Treasury Taskforce.

HM Treasury (2003), PFI: Meeting the investment challenge. (Available at: www.hm-
treasury.gov.uk) accessed on 15.07.2004.

IFSL (2003), “PFI in the UK: Progress and Performance”, PPP Brief. International Financial
Services, December. Available at: (www.ifsl.org.uk) accessed on 17.05.2004.

Jackson, P.M. (2004) ‘The Private Finance Initiative. From the foundations up-a premier’,
Hume Occasional Paper No.64. The David Hume Institute.

522
Kee, J.E. and Forrer, J. (2002), Private Finance Initiative – The Theory behind the Practice,
14th Annual Conference of the Association for Budgeting and Financial Management,
October 10-12 Kansas City, Missouri, USA.

Lam, P.T.I. (1999), “A sectoral review of risks associated with major infrastructure projects”.
International Journal of Project Management, 17(2), pp.77-87.

Lloyd, R.H. (1996), Privatisation of major road tunnels in Hong Kong through build-operate-
transfer arrangements. Conference on “Highways into the Next Century”, pp.109-117.
Hong Kong Institution of Engineers.

McCarthy, S.C. and Tiong, S.L. (1991), “Financial and contractual aspects of build-operate
and transfer projects”. International Journal of Project Management, 9, (4), pp.222.227.

McDermott, P. (1999), “Strategic Issues in Construction Procurement” in Procurement

Systems-A guide to Best Practice in Construction Rowlinson, S. and McDermott, P. (eds),
London E & FN Spon: 3-26.

Merna, A. and Smith, N.J. (1991), “Concessions and risks in BOOT projects”, in Proceedings
of Association of Researchers in Construction Management Annual Conference,
University of Bath, Bath, pp. 11-19.

Merna, A. and Smith, N.J. (1994), “Concession Contracts for Power Generation”,
Engineering, Construction and Architectural Management, 1, 1, pp.17-27.

Morris, P.W.G. (1994), The Management of Projects. Thomas Telford, London.

NAO (2001), Modernising Construction, Report by the Comptroller and Auditor General, HC
87 Session 2000-2001.

Ogunlana, S.O (1999), (Ed.) Profitable Partnering in Construction Procurement, CIB W92
and CIB TG 23 Joint Symposium, E & FN Spon, London.

Özdogan, I.D. and Birgönül, M.T. (2000), “A decision support framework for project
sponsors in the planning stage of build-operate-transfer (BOT) projects”. Construction
Management and Economics, 18, pp.343-353.

Payne, H. (1997), “Key legal issues in projects procured under the Private Finance Initiative”.
Engineering, Construction and Architectural Management, 4/3, pp.195-202.

Tiong, R.L.K. (1990), “BOT projects: risks and securities”, Construction Management and
Economics, 8, pp.315-328.

Tiong, R.L.K. and Alum, J. (1997), “Distinctive winning elements of BOT Tender”.
Engineering, Construction and Architectural Management, 4/2, pp.83-94.

Walker, C. and Smith, A.J. (1995), Privatised Infrastructure – The BOT approach. London,
Thomas Telford.

523
Woodward, D.G. (1995), “Use of sensitivity analysis in build-operate-transfer project
evaluation”. International Journal of Project Management, 13, (4), pp.239-246.

524