Communities and Local Government

This guide has been written specifically for Fire and Rescue Authorities (FRAs) as an introduction to the Private Finance Initiative (PFI). It aims to give an insight into what these arrangements involve and some of the issues relating to this form of procurement. It should help stakeholders and those new to PFI to understand what is involved.

PFI has been used already by a number of FRAs to deliver a range of projects including:

• The building and maintenance of new fire stations
• The building of training facilities and the provision of facilities management services including maintenance, cleaning, catering, janitorial and training services.
• The procurement of a vehicle fleet and equipment and the management of this specialist equipment.
• The building and maintenance of a community safety centre.
• The building and maintenance of community safety shops.
• Refurbishment and management of existing accommodation including fire stations, headquarters, workshops, training departments and control room functions.

This guide is intended to be an introduction to the basics of PFI. If you have more detailed questions there are some further contact points and sources of information listed at the end of this guide.

PFI is a method of procurement by which partnerships can be developed between the public and private sectors. These initiatives can deliver various projects, including the design and development of new assets, the refurbishment of existing assets as well as the provision of associated services, such as repairs and maintenance.

Each PFI project is different depending on local circumstances. However there are some common threads, which run through all projects, which are described below.

• A PFI contract with a Private Sector Partner (PSP) will typically last around 30 years
• The Authority will devise an 'output specification' which sets out what the PSP is expected to achieve.
• The PSP is paid a fixed amount over the course of the contract and on a performance basis. This is known as the Unitary Charge or Unitary Payment.
• If the PSP fails to meet any of the agreed standards it will lose an element of its payments until standards are improved.
• If the PSP does not perform the public sector can ultimately terminate the contract.

Some of the benefits of using PFI include:

• Experience to date has shown that where PFI has provided a service, the FRA has the assurance of knowing that the assets and services will be provided to agreed standards for the life of the contract.
• As a FRA does not make a payment until the service commences, the PSP an incentive to finish construction on time.
• A FRA can benefit from the commercial, financial and technical expertise of the PSP.
• Risks can be allocated to those best able to manage them.
• PFI contracts will specify that the building or equipment must be returned to the Fire and Rescue Authority in prime condition.

Some cautionary notes about PFI are:

• A PFI project involves significant financial complexity and will require the procuring bodies to appoint financial and legal advisers to complete the transaction. Projects with a capital value below £10 million should not be considered although projects with a joint capital value of over £10 million can be.
• PFI procurement costs may be more expensive than conventional procurement costs. PFI does not suite projects providing facilities or services that do not contain a substantial capital asset.
• PFI should only be pursued where it offers genuine value for money and should not be pursued because of affordability considerations.

The standard template of a PFI contract is an agreement whereby a PSP (or SPV - see below) provides an asset for the public sector in the first few years of the contract. Thereafter the SPV provides the necessary services to maintain and operate the asset at an agreed level for the remainder of the contract, together with any additional services that may be required.

In return for this the PSP receives a fixed level of payment, linked to its performance in meeting agreed standards of provision. Funding to assist with the capital element for these projects is given by central government in the form of what are known as 'PFI credits'.

In order to bid for the work the PSPs generally form consortia. To provide the asset required by the contract they will borrow the necessary capital from a equity provider and pay off the debt over the majority of the contract life. In doing so they are dependent on the income from the contract to fund the debt and interest payments. It is therefore in their interests to ensure that they do not incur financial penalties and maintain the contract standards.

PFI credits are allocated to projects by Government Departments, in this case the Department for Communities (Communities and Local Government) and Local Government to assist with the capital costs of the project. The credits provide Revenue Support to FRA's from Communities and Local Government. [Await outcome of the consultation on RSG for PFI.]

Effective management is crucial to the successful delivery of a PFI procurement. Effective management structures need to be in place to control the process, to ensure that timetables are kept to and to ensure that decisions are taken on time. Typical management structures for PFI projects include some or all of the following:

• A project board or steering group, usually comprising the senior budget holder and senior user, with authority to sign off the project at each key stage.
• A project sponsor who knows the business and can make decisions about the project.
• A project manager to steer the procurement process and ensure everything is done within budget and on time.
• A project team of people with the skills to take the project forward (including Lead/Financial, Technical and Legal advisers).

The PSP is frequently a commercial organisation known as a Special Purpose Vehicle (SPV). This is a group of companies that have joined together to form a single organisation specifically for the purposes of bidding for a PFI contract. Essentially it is a shell organisation designed to fund the contract.

Depending on what is included in the contract the SPV is likely to include:

• Equity Provider;
• A contractor or builder;
• A facilities management provider.

In most cases the SPV will be asked to design, build, finance, operate, and maintain existing or new fire and rescue service facilities.

Some PSPs may fund projects on their own balance sheet - in other words provide the funding themselves. However, more often, bidders use project finance from banks and other financial institutions to fund PFI contracts. During the selection process they will need to provide detailed financial models showing how, amongst other things, they intend to fund a project over the lifetime of the deal.

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