International Construction Law Review
THE PRIVATE FINANCE INITIATIVE, PUBLIC PROCUREMENT AND THE CONSTRUCTION INDUSTRY
DIANE WILSON AND LAWRENCE BRUCE
Partners, Buchanan Ingersoll, London With additional research by Lydia Challen and Mark Handley Associates, Buchanan Ingersoll, London
This article has three parts: Part I explains the background, main features and contractual structure adopted for implementing the Private Finance Initiative (“PFI”) in the United Kingdom whilst Part II analyses the Law of Public Procurement, remedies for breach of Procurement Rules, its effect on the PFI and areas for reform. Part III considers some of the effects of the PFI risk philosophy on the construction industry, and the development of a PFI product.
PART I: THE PRIVATE FINANCE INITIATIVE
Background to the PFI
The PFI was formally launched in 1992 by the Conservative Chancellor of the Exchequer, Norman Lamont.
The use of private funds for public projects had been on the Government’s agenda since the 1980s, but the rules setting out the basis on which such funds could be used were quite restrictive.1
The earliest private sector infrastructure projects included the construction of the Channel Tunnel (awarded in 1985), the Dartford Crossing (awarded in 1987) and the Second Severn Crossing (awarded in 1990).
The Private Finance Panel was established in 1993 to encourage the use of the PFI across government2
and in 1994 it was announced that capital projects would not be approved unless the PFI option had been tested. Public capital was to be reserved for areas where private finance was inappropriate or would not produce value for money
. This led to a flood of projects coming forward. It was difficult for the private sector to assess which projects were likely to be successful to focus limited bidding resources, and concerns as to the vires
of the procuring authorities prevented all but a handful of projects reaching financial close.
1 The “Ryrie Rules”, which were the product of a committee led by Sir William Ryrie, which reported in 1981. The principal rules were that (1) privately funded projects had to be tested against a publicly funded alternative and shown to be more cost effective, and (2) save in exceptional circumstances, a privately funded project would result in a pound for pound reduction in available public expenditure.
2 The Private Finance panel produced several volumes of guidance, such as: Private Opportunity, Public Benefit
—Progressing the Private Finance Initiative
(November 1995); A Step by Step Guide to the PFI Procurement Process (July 1997); Basic Contractual Terms
(October 1996) and Further Contractual Issues (January 1997).
[2000
The International Construction Law Review
570