Major players are falling out of love with PFI, exasperated by the lengthy and costly process. Phil Clark assesses Labour's bid to woo them back – preferably in time to build key schemes before the next election.
Contractors are reaching the end of their tethers with PFI. Firms are pulling out of deals, scaling back operations and even considering abandoning the field, fed up with the amount of time and money sucked into the tortuous process of selecting a preferred bidder and signing a deal.

"Unless they impose some sort of timetable, the whole thing could collapse," complains one disgruntled contractor.

The government is, naturally, alarmed, and last week released new guidance to facilitate the bidding process and help contractors deal with costs (see "Laying down the ground rules", right). But this is not purely for selfless reasons – among the casualties of the crisis could well be the new hospitals and schools Labour badly needs to have built by the next general election.

Amey's plight is a prime example of the issues affecting the initiative. Last month the support services group, which has been aggressively targeting the PFI market in the last three or four years, was forced to inform the stock exchange that its cash flow would be hit by the delay of the biggest of all the public-private partnership deals, the £16bn refurbishment of London's Tube system. The deal was set back by at least a year because of court action lodged against the scheme by London mayor Ken Livingstone. However, last month Livingstone dropped his challenge, and the Tube PPP is finally expected to reach financial close next month.

Despite this gleam of light, Amey's financial woes have forced it to scale back its PFI ambitions. A restructuring has led to the merger of its business development and programme management divisions and the departure of business development director Robert Osborne. And last month the Leeds Tramlink consortium, of which it was a member, pulled out of the £500m Leeds supertram scheme.

Amey is not the only firm to suffer at the hands of the PFI. Other contractors such as Carillion and WS Atkins have also watched their profits fall because of changes in accounting that affect how bid costs are dealt with on

their balance sheets. However, the fundamental problem remains one of getting projects on site and making money for contractors and backers. Many see the Amey story as an extreme example of a wider trend among PFI contractors. "It might be Amey under the spotlight, but it's happening to us all," observes one contractor.

A month before Amey admitted its problems, Bovis Lend Lease also withdrew from a troubled PFI housing project – a £30m refurbishment scheme in Camden, north London. And other sectors such as courts and hospitals have also been struggling to attract enough interest.

The clients, the Lord Chancellor's Department and the Department of Health, have instigated reviews to find out why regular bidders are being put off.

Looking at the numbers, however, the trend is unsurprising. The share prices of many contractors, especially in support services, have slumped (Amey's has fallen two-thirds since the New Year) and their ability to raise cash has diminished. No wonder Amey was demanding repayment of bid costs if its consortium lost the Leeds tram job.

Last year Atkins spent £2m on the £1bn Colchester Barracks project, now delayed for two years (see "Symptomatic: three problem projects", below). And trade sources claim Atkins' partner on the job, Sir Robert McAlpine, has spent upwards of £10m on the bid so far, a sum that has led the firm to considering whether it has a future in PFI. Norman Critchlow, chief executive at M&E contractor Emcor, attests to the high costs incurred – especially if you lose at the last hurdle. "If you lose at the BAFO [best and final offer] stage it can be a very painful time, as the bid costs you can incur can be enormous. It also takes a significant amount of time for the winners to be decided."

It might be Amey under the spotlight, but it’s happening to all of us

PFI contractor

The government has made some attempt to deal with these concerns, aware that it will feel the effects if key PFI schemes such as hospitals and schools are not built in time for the next election. The guidance released last week by the Treasury's procurement agency, the Office of Government Commerce, is supposed to lead to speedier negotiations and savings on advisers' fees. The OGC reckons it will also speed up deals by standardising clauses in PFI contracts.

"In future, you can insert the standard refinancing clause and that's it," claims one Treasury official. There will also be "what if?" clauses to cover cases where the contract is terminated mid-way through a deal. "This will allow everyone to spend more time on what really matters – getting the right design and the right cost."

The OGC hopes an improved contractual procedure, combined with other reforms, will create a more efficient system. In March, the NHS implemented procurement changes to reduce the number of bidders for jobs and to reimburse bid costs if health trusts required more design work than originally sought.

Treasury officials add that client departments and authorities are now trying to ensure projects are well thought-out and planned before going to the market.

But the private sector needs convincing that the new guidance has teeth. "There are still government departments and local authorities who believe they know better than the collective industry," says one PFI consultant. Tim Steadman, head of construction at solicitor Clifford Chance, supports the guidance and believes it will speed up deals – with one large proviso: "The degree of rigour applied by the public sector to these documents is crucial," he says. "They [local authorities and departments] can't cherry-pick between the bits they like and the bits they don't like."

In an attempt to meet such concerns, the Treasury PFI advisory body Partnerships UK has set up a helpline through which the private and public sector can ask for advice – and report poorly performing authorities or contractors. "They should definitely use this," says one official. "What will frustrate us is if in six months there are loads of people saying it's not working – but not telling us about it." The OGC adds that its chief executive Peter Gershon has drawn the new guidance to the personal attention of all departmental permanent secretaries.

But for some in the private sector, this is not enough. Robert Osborne, former Amey business development director and chairman of the Business Services Association, wants a more radical approach. He challenges the amount of design needed during bidding, and still feels the whole process – prequalifying for a job, invitation to negotiate, best and final offer, preferred bidder – is too cumbersome. "It's a hell of a burden," Osborne says. "I think we should look for something more radical still, which still allows the public sector to choose the right partner. It's up to the private sector to come up with new ideas."

His views are shared by industry colleagues. Brian Norton, director at PFI adviser Precept Programme Management, believes the BAFO system is often unnecessary. "Contractors' prices are competitive enough," he says. He reckons the private and public sectors have too much of a "this is how it's always been done" mentality. Norton says: "We are abiding by rules that have been around since 1995, when PFI started.

There is a great folklore about how to do it.

Laying down the ground rules

The new Office of Government Commerce document is a revision of original PFI guidance published in July 1999. It runs to more than 400 pages and covers the whole process from construction to maintenance, payment levels, subcontractors, termination of contract and employees. One clause may offer some good news for contractors: bonus payments will be offered to consortiums if construction is completed early. There are also clauses on:
  • Refinancing PFI consortiums can improve profits by restructuring their debt during a deal, usually when construction is complete. They claim this is fair because of the risk involved in doing the job. The unpopularity of the practice has led the government to insist the public sector claws back some of this profit. From now on, all PFI deals will split refinancing gains 50/50.
  • Funding competitions These are contests held late in the PFI process for financial backers of schemes. The most famous example is the £170m refurbishment of the Treasury building. Funding watchdog the National Audit Office claimed the client saved money by shopping around for backers. PFI bidders dispute this, claiming the money was saved because loan rates changed during the competition, and that the process slows PFI even more. The new guidance accepts that funding competitions should be the exception rather than the rule, and should be considered on larger projects that have fewer bidders or if there is a long gap between appointing the preferred bidder and financial close.
  • Symptomatic: Three problem projects

  • Colchester Barracks
    A consortium including contractor Sir Robert McAlpine and consultant Atkins was appointed preferred bidder on this £1bn barracks redevelopment in Essex in late 1999. The consortium expected financial close on the scheme, which amounts to construction of a small town for 5500 army personnel, late this year. In June, the Ministry of Defence told the consortium that the scheme would not be closed until 2004, because of delays carrying out archaeological and wildlife surveys and issues over the diversion of footpaths. The MoD was phlegmatic about earlier concerns over delay. “I don’t think speeding up the process is something I’d want to do,” Lewis Moonie, undersecretary for defence, said in January.
  • Farnham Community Hospital
    Contractor Gleeson finally reached financial close on this health project five years after it was appointed preferred bidder, in August 1996. The contract was dogged by changes in specification after plans to include private housing on the site fell through. Gleeson’s consortium partner changed from financial backer Rotch Group to the Mill Group and the price rose from £15m to £21m. Construction is due for completion next summer.
  • Newham General Hospital
    A Laing/Hyder joint venture (the partnership is now called Equion) became preferred bidder for this £25m job in August 1999. Reports at the time said the duo would be seeking financial close “as soon as possible” on the scheme, which would provide a new diagnostic centre and in-patient accommodation. Financial close is not due until the end of this year.