Risky business

I refer to the articles on the PFI in your 23 September issue, and wonder whether the UK contracting industry will ever learn. PFI is not working as it could, agreed. But there’s no point blaming the public sector clients – that’s just too easy. It is the market that is at fault, dominated as it is by large contractors whose prime motivation is to win large building contracts without understanding the big picture. Of course clients may ask for the earth; that is their prerogative. But it is a foolish market that provides it, especially for inadequate reward. It is the willingness of the major contractors to spend ridiculous sums while still in competition – without compensation provisions – that has led to the present unsustainable position.

What is remarkable is that businesses that are in a high-risk industry continue to be so poor at understanding, pricing and dealing with risk. The excuse for working at low margins in the traditional building contracting market is the ease of entry. This most certainly does not apply in PFI. I can imagine no other industry that would spend £34.5m to bid for a £200m contract where the profits are unlikely to reach anywhere near that figure and there is no guarantee that the project will go ahead at all. This is suicidal.

The only justification for the PFI market’s behaviour is that it has been able to restrict itself to a small number of national players, and it has been able to argue successfully – but unjustifiably, in my view – that school projects, for example, should be bundled into packages totalling more than £100m. Regional contractors, which have greater efficiency in the £10m to £20m projects size (that is, the size of a typical secondary school), have been squeezed out.

So the public sector client is undoubtedly picking up the tab not only for the massive “big contractor” bid machinery, but also for buildings that are expensive at the fundamental level. The argument for supporting this scenario is the financial substance of the big contractors, but even this is to some extent illusory, based as it is on the perceptions created by high turnover.

PFI needs to change to enable a wider choice of building contractor with lower (or underwritten) bid costs, but the major contractors also need to undertake a thorough examination of their own business practices.