Buy now, pay later?

Off balance sheet borrowing, passing the buck, shirking the responsibility of government. The Private Finance Initiative (PFI) has had all these accusations and more hurled at it in the recent past. The criticism of PFI stems from its beginnings under the Conservatives and its failure to produce anything like what was expected. The scheme has since been embraced by Labour, and is starting to have an impact. This is exactly what the government wants – that its promise of 550 new schools and 100 new hospitals can be delivered, without ballooning public borrowing.

But this is where some see the problem. Bill Watts, building services engineer at Max Fordham LLP says: "There are many ways of raising money, but it comes out of the public sector borrowing requirement, PFI doesn't. It's mortgaging your life away, just in a different manner. But it's not transparent, it has been done in an underhand way." The idea behind PFI is that all the risk involved in bidding for the project is transferred to private consortia. But Watts believes that this risk is then going to be minimised in every way possible by the private sector in order to maximise profit. This then leads to the debate over the quality of the end product. "There is no transfer of risk, only transfer of gain," says Watts. " Once they have won the contract, they will make a profit on it. I think that leads to bad design as night follows day. The time spent designing something is as minimal as possible because it's all at risk. Once you get the job, you need to then build it quickly to maximise your return. There isn't a good interrogation of design. The idea that the private sector will pull together and provide this coherent, well researched design that meets the brief at the lowest possible cost and is completely integrated depends on the willingness of the parties round the table to cooperate."

Another problem with PFI is the exclusion of a number of parties who don't have the means to enter the expensive bidding process. That can take up to a year to conclude and costs well beyond the realms of acceptable risk for many organisations. Denis Lillie regional director at White Young Green says: "There is only a certain number of key players in the market place which can deliver PFI. There are a lot of traditional organisations which at this stage would be working with an education authority or NHS trust but are now not getting the work because they can't afford to bid. They can't carry that level of risk without being paid until a contract is awarded. This can take from six to 12 months."

The transparency of the bid process has also come under fire, in terms of the number of bidders taken on by the client, and the clarity over which projects will actually be given the green light. Lillie says: "We have found in certain situations that we have invested quite heavily in a project and it has been cancelled for whatever reason. So the government needs to be clearer on which projects are going to go ahead. We were bidding for one PFI and were led to believe that three or four would be shortlisted, which is acceptable for the investment you need to put in. But we found out they were actually shortlisting seventeen, so we pulled out because we thought this was unfair competition."

The debate over the quality of the end product is also raging. The need to see a return in as short a time as possible; to deliver the building within the constraints of the bid process; and to provide an end product that gives value for money is a difficult balance to strike.

The value for money tests on PFI projects have come in for criticism. It has been claimed that they don't carry much currency as there don't appear to be any other options for the provision of new public sector buildings. Lillie believes that value for money is something very difficult to guage at the start of a PFI project: "The value for money test is hard to ascertain at bid stage. I think it only becomes apparent as the building is progressively built. An assumption has to be made on the cost of the building. Normally you work backwards from that figure and there are a lot of compromises along the way. In some instances you probably don't have a full brief as to the requirements of the building in terms of building services, IT and so on. So they may have underestimated that and therefore have to compromise the project in other areas."

The problems then, seem evident enough – criticism of the long-term cost, exclusion of smaller parties due to bid costs and risk, and a compromised quality in the final product. So what needs to be done to sort the problems out?

It is time, says Lillie, to review the process, to see where the problems are and eradicate them: "Now that some are being built you begin to see where the shortfalls and strengths are. It has been going on long enough and I think it's time somebody stepped back to reassess and take the best from each of them. Then you could combine that to create a centre of excellence for PFI."

Dave Hull, partner at Buro Happold, believes that the way forward is to build up a bank of knowledge about PFI projects, in order to take the best aspects from the previous job onto the next one. In theory this means that engineers could work without having to spend time and money on a problem that has been solved before, freeing up those two valuable commodities to be used elsewhere: "There is a huge opportunity here to develop a repository of good practice. Then when someone comes along to do a school or hospital PFI, they don't have to start from that same low level. If we've already established a package that will work in certain circumstances, why do that exercise again? I'm not suggesting we prescribe something to the client but we know what will produce a good environment, so let's put that in the bank and focus on something else, so we're starting from a better knowledge base."

There is a tendency for design to follow what Hull describes as a "prescriptive route", particularly in the health sector: "There is a mind set in health that if you haven't done one before you can't do one. My view is that there are so many books written on it that if you put it all together with a bit of grey matter you get good design. If we've done something good we need to reflect it in the next project."

Watts sees no reason why the whole PFI process can't be made fully transparent: "At the moment the winning team isn't the winner on design, it wins on the finance package and which consortium will take the biggest risk. The other way of doing things is to have tendering based on quality, you have a set price and say what you can offer for that, then assess the quality of the bids, rather than say 'here's a brief, what's your price'. You can still maximise profit but at least it's transparent and it puts the ball in the court of quality rather than cost."

The question of whether PFI can work isn't perhaps the right one to be asking. Clearly, it can, and there are examples of buildings that prove it. To work properly though, it requires each of the parties involved in PFI to take responsibility for what they are producing. Watts believes providing services to the public sector is "driven by a certain amount of idealism and responsibility; profit is not".

It is this conundrum that is at the heart of the PFI debate. The question that really needs to be answered, is whether or not everyone at each stage of the process is willing to understand what it takes to provide a quality end product. The scheme that has been described in some quarters as the greatest ever buy now pay later deal is here to stay, says Mr Blair, so surely it's better to get it right now, than to be left paying in 20 years time for buildings that nobody wants.