So, do contractors think it is still working? And with more efficient imitators sprouting up in Europe can the government hold on to the homegrown talent?
According to a survey by accountants KPMG, revealed exclusively to Building, the PFI is being stretched like a victim on the rack, with more projects coming out and fewer firms willing to bid for them. Based on responses from 200 executives at major contractors, 90% of them at director level, the survey results give a rare insight into what the major players think of the PFI. The answer is that directors are frustrated by the vast amount of time and money that they have to devote to winning bids – not to mention losing them. And, paradoxically, winning a run of PFI contracts actually discourages a company from bidding for more. KPMG partner Tony Rocker explains: "As a company's PFI portfolio gets bigger, you need more management time to manage the contracts, so management has less time to prepare new bids."
Management time isn't the only scarce commodity: even the biggest contractors are running out of capital to invest in the PFI market. Rocker says: "The net cash contractors are putting into PFI is much bigger than the net cash they're getting out at the moment. There should be a capital squeeze at some point – there's a limit to how much equity they can put in."
Since companies are reluctant to put in bids, there is a shortage of capacity in the market.
The result, says Rocker, is that the government must confront a big problem: "There are more and more projects with fewer and fewer bidders."
Over half of the respondents said the single biggest disadvantage to entering the PFI market was the cost of bidding. For a major scheme, the cost can easily reach £1m for each company in the running. "You're asking a shortlist of three to design projects to a very advanced stage," says John Richards, group financial director of Miller Group. "You're taking the intellectual capital from three bidders and leaving two of them on the shelf." Kier Project Investments' managing director Jim Byrne says: "The worst scenario is coming second, because you've spent all your money and management time and you end up being the bridesmaid."
The upshot of such a painful courtship is that some British contractors are leaving the PFI market. Richards says: "A lot of people have backed out because of bid costs and timescale." Major hospital PFIs now begin with just two bidders. A mere 2% of the survey's respondents said competition from other companies was affecting their ability to bid for PFIs. Byrne reckons that in his area of expertise, namely healthcare, Kier has just eight competitors: Amec, Carillion, Sir Robert McAlpine, Taylor Woodrow, Equion, Bovis Lend Lease, Skanska and Bouygues. He says: "On the larger hospital schemes, the number of tenders is coming down to just two or three because of the cost of failure."
So what should the government do to attract more bidders to the PFI market? Unsurprisingly, every contractor you talk to has an opinion on the subject. Byrne's solution is to compensate the company that has the misfortune to work on a bid for a year and end up coming second: "The government should be committed to refunding the costs of the runner-up bidder." Richards, on the other hand, would like to see the bid process shortened by picking the winner at a much earlier stage: "The government should base its decision on track record and the bidder's early design stage concepts."
Unlike many major contractors, KPMG's Rocker reckons bidders should continue to pay their own way. He says: "The purpose of PFI is that private sector risk means you get the best bid: bid costs hurt, but they work. I wouldn't advise the government to shift it the other way – players who want to stay in the PFI market will have to find a way to pay the bid costs."
But Rocker adds that the government needs to take action soon by speeding up the bid process, because Britain no longer has the PFI market to itself. Examples abound of successful PFIs abroad: a privately financed toll road in Norway that went from first bid to financial close in six months – three times faster than a typical British project. British firms recently bid for schools PFIs in Italy, and now they are sniffing around hospital PFIs in Portugal. The Royal Bank of Scotland advised Iceland's government on a pilot PFI school, and British firms have already worked on infrastructure PFIs in Holland, Belgium and Ireland. Even the French government, traditionally resistant to anything resembling privatisation, is currently pushing through legislation to enable public building programmes in France to draw on private finance.
The UK needs to make sure its schemes are competitive in the world market. Working overseas is becoming attractive
Tony Rocker, partner, KPMG
These projects are just a smattering of the ever-increasing range of PFIs abroad, and the long list matters because every PFI bid a British contractor makes abroad is one less bid that it can make at home. Rocker warns: "The UK needs to make sure its schemes are competitive in the world market. Working overseas is becoming more attractive than working in Britain because of shorter bid times and costs, and that's already a problem for the government."
Not every contractor is looking beyond the English Channel, however. Kier's Byrne says: "This island is big enough for us at the moment." And Richards says Miller hasn't had any luck in France an Germany, which he claims are less willing than Britain to give big contracts to foreigners. He says: "We find France and Germany shut for business. It's one-way traffic – they come here, but they won't let us go there." Nevertheless, some contractors are winning work abroad: in May Carillion was named preferred bidder on its first overseas hospital project, to design, build and operate a 608-bed hospital in Ontario, Canada.