Theoretical and Practical Applications of Risk Analysis Within the Private Finance Initiative



Theoretical and Practical Applications of Risk Analysis Within the Private Finance Initiative

Authors

GANNON M, London Underground, UK

Description

The PFI was launched in the Autumn Statement of 1992 by the then Chancellor of the Exchequer. Its intention was to bring the private sector into the provision of services and infrastructure traditionally regarded as exclusively public. At this time the pr

Abstract

The PFI was launched in the Autumn Statement of 1992 by the then Chancellor of the Exchequer. Its intention was to bring the private sector into the provision of services and infrastructure traditionally regarded as exclusively public. At this time the previous Government drew the conclusion that the public sector record in managing projects in such areas as; design, construction of capital scheme is poor. There is a lack of commercialism with projects in the hands of technicians.

The PFI is a mechanism, introduced as part of a package of measures to reduce the Public Sector Borrowing Requirement (PSBR), by encouraging the use of private sector funds to finance traditionally public sector projects. To date LUL has achieved 2 successful deals; the Northern Line Trains service contract [5] and IT at Canary Wharf. Other major deals in the pipeline include; Power, Prestige, Connect and Piccadilly Line Extension to Terminal 5.

A key criteria for evaluation of any PFI 'deal' is whether the public sector has achieved value for money (VFM) [4],[8]. This being a test to whether the PFI solution represents better value for money than the Traditional procurement on a whole life cost basis. Additionally each deal must be 'off-balance' sheet satisfying accountancy regulations (i.e. FRS5 and/or SSAP21), demonstrating that sufficient risk is transferred to the private sector. Emphasising for both VFM and 'off-balance' sheet treatment the importance of evaluating risk within a project.

Conducting a risk analysis is a lengthy exercise however it is a valued exercise since there are wider benefits to be gained by the sponsor, in addition to evaluating value for money, such as; increased project understanding, scope issues, a checklist for writing an effective contract and an aid for forecasting the future. Sometimes confusion can arise when evaluating risk for a project under two distinct procurement routes. A comprehension of the risks relating to the scope and cost components of the procurement scenarios being compared need to be well understood before commencing a risk analysis.

The aim of the paper is to provide guidance on both theoretical and practical aspects, highlighting the potential pitfalls of a risk analysis.

Publisher

Association for European Transport