Public Sector Comparators for UK PFI Roads: Inside the Black Box
R Bain, Robert Bain Traffic & Transportation, UK
Using original material released by the Highways Agency for the first time, the author recreated the public sector comparators (PSCs) used for the evaluation of the first eight road projects to be promoted under the UK?s private finance initiative. These spreadsheet-based recreations show the different components of the construction and operating costs assumed for each of the project roads, and the overall balance between the upfront construction and the longer-term operations obligations. They provide insight into the process of compiling the PSCs by revealing the evidence base underpinning the various cost estimates employed, and they make explicit the assumptions that were made about cost profiling over the 30 year contract terms.
Having recreated the PSCs from first principles, the spreadsheet models allowed for the impact of alternative assumption sets to be assessed. Alternative assumptions regarding project risks were modelled using different levels of optimism-bias uplift, and the impact on value-for-money of using different discount rates was evaluated.
PFI and PPP public sector comparators have attracted considerable attention in the literature as they retain a pivotal role in the policy decision to use ? or not use ? private finance. Indeed, the ex ante value-for-money expectations of using private finance derive largely from public sector comparator calculations. However the fact that their detail is usually kept confidential by public sector procuring agencies ? because of commercial sensitivities ? has restricted informed discussion and open debate. Previous authors have generally focused attention on theoretical or conceptual matters. Now the architecture of these comparators is laid bare for critical examination.
It has generally been assumed that, all things being equal, any reduction in the discount rate used in PSC calculations will favour conventional procurement over PFI-type contracting arrangements. The research reported in this paper demonstrates that the relationship between the discount rate and the attractiveness ? or otherwise ? of using private finance is not as simple as has been assumed, and the outcome in terms of value-for-money is not as predictable as has previously been reported.
Association for European Transport