Collapse calls PFI into doubt

A wave of collapsed PFI deals is unlikely to follow the liquidation of a vehicle company set up to deliver services to the health service in Croydon, PFI experts warned this week.

Managers at Croydon’s Mayday Healthcare NHS Trust called in the receivers for the Mayday Energy Care which failed to complete construction of an energy and waste incineration plant.

However experts believe that contracts negotiated on PFI deals are so robust that the Croydon controversy does not herald further trouble.

Peter Fanning, chief executive of the 4Ps, a company set up by local government to advise on PFI deals, said PFI projects are structurally more robust because of the analysis and exhaustive negotiations that take place before signatures are placed on paper.

He said: ‘You are likely to go through a very much higher level of due diligence reporting than you would in a traditional contract. You would therefore expect PFI transaction to be much safer.’

Last week some commentators said it was inevitable that a PFI company would eventually go to the wall and warned that more could follow the collapse of the Mayday deal.

But Fanning said: ‘I see no evidence for that.

In the Croydon case the health trust exercised its ‘step-in’ rights when the contractor failed to complete work on time.

PFI is no longer a minority activity for local authorities and has become a main method of providing capital to build public amenities. Hospitals and schools have all been built using the procurement strategy though it has proved controversial.

Local authorities have a number of ways of shielding themselves during the course of a project, most of which centre on protecting themselves against an increase in costs.

Firstly, unlike in ‘traditional’ contracts payment is not made until construction is finished. Traditional arrangements allowed for payments in stages but under PFI contractors know they will not receive any money until they deliver on time and to cost.

The long-term nature of a PFI deal also gives incentives for contractors to stick to specifications. If a contractor has to maintain a building over 25 or 30 years it is in his interests to ensure construction is done to specification to minimise later upkeep and repair.

The public sector also gains assurance from the way projects are financed. Because they do not pay in advance contractors must seek financing. Some may come from equity but mostly projects will be funded through bank loans. Banks just do not lend such large sums of money unless they are convinced the project is deliverable.

Stephen Sellars, assistant director of legal services at Birmingham City Council, which has been at the forefront of initiating PFI projects, sees no reason to assume PFI projects will collapse en masse.’If a project is being financed by a high street bank they are just not in the business of lending money at risk. They will want to make sure that they are paid back,’ he says.

Other PFI controversies rumbles on as politicians and Treasury officials continue to argue over whether projects should be on or off the public balance sheet.

Much of the benefits from PFI are gained because the projects are off the balance sheet. But a recent Commons Treasury committee report said liabilities as a result of a PFI project has to be noted somewhere. They stopped short of demanding it should be on the balance sheet but heavily criticised the Treasury for seeking an off balance sheet solution.