This document provides an overview of Public Private Finance Initiatives (PFI) in the UK construction industry. It discusses the history and development of PFI, comparing it to traditional procurement methods. Key aspects covered include the different parties involved in PFI (special purpose vehicle, third-party funders, awarding authority), the bidding and operational process, and types of risks associated with PFI projects. The document aims to examine whether PFI can offer value for money to the public sector through an analysis of literature on PFI's advantages and disadvantages.

1. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
AN ANALYSIS OF THE USEFULNESS OF PUBLIC PRIVATE
FINANACE INITIATIVES (PFI) IN THE UK CONSTRUCTION
INDUSTRY
A dissertation submitted to The University of Manchester for the degree of MSc in
Engineering Project Management in the Faculty of Engineering and Physical Sciences
2013
AHMED JADELRAB
SCHOOL OF MECHANICAL, AEROSPACE AND CIVIL ENGINEERING

2. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
LIST OF CONTENTS
List of Tables
List of Figures
Abstract
Declaration
Copyright statement
Acknowledgements
List of abbreviations
1.0 CHAPTER1: INTRODUCTION
1.1 Overview
1.2 PFI procurement mechanism vs. Traditional route
1.3 PFI Parties
1.4 Risks types in PFI projects
1.5 Rationales to undertake this study
1.6 Purpose of the research
1.7 Hypothesis
1.8 Research Aims and Objectives
1.9 Scope and Limitations...
1.10Guide to the Content....
1.10.1 Chapter 1: Introduction...
1.10.2 Chapter 2: Research Methodology
1.10.3 Chapter 3: Literature Review
1.10.4 Chapter 4: Discussion
1.10.5 Chapter 5: Conclusion and Recommendations
2.0 CHAPTER 2: RESEARCH METHODOLOGY
2.1 Introduction
2.2 TYPES OF RESEARCH
2.2.1 Experimental research
2.2.2 Analytical research
2.2.3 Exploratory research
2.2.4 Descriptive research
2.3 RESEARCH METHOD
2.3.1 Qualitative research
2.3.2 Quantitative research
2.4 PRIMARY AND SECONDARY DATA
2.5 SELECTION OF RESEARCH APPROACH
2.6 DATA COLLECTION FOR LITERATURE REVIEW
2.7 Data collection for case studies
2.8 Discussion and Recommendations
2.9 SEARCH STRATEGY
2.10 Keyword
2.11 Sources of information
2.12 Refining Search

3. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
3.0 CHAPTER3: LITERATURE REVIEW
3.1 INTRODUCTION
3.2 Overview
3.3 Theme one: History of PFI: Past and Present
3.3.1 Before the PFI
3.3.1.1 The Ryrie Rules
3.3.2 The birth of the PFI
3.3.2.1 PFI under the Labour Government
3.3.2.2 Treasury Task Force
3.3.2.3 Partnership UK
3.3.2.4 The Office of Government Commerce (OGC)
3.3.2.5 HM Treasury Private Finance Unit(PFU)
3.3.2.6 Public-Private Partnerships (PPP) Programme
3.3.2.7 Meeting the Investment Challenge
3.3.2.8 VFM Assessment Guidance
3.3.2.9 Building Schools for the Future (BSF)
3.3.2.10 Reform of the Project Review
3.3.2.11 Strengthening Long Term Partnerships
3.4 Structure of PFI
3.5 The Procurement Process
3.6 The PFI Process
3.7 Theme two: Value for Money (VFM)
3.7.1 The importance of Facilities Management
3.7.2 Risk Transfer
3.7.3 Focus on Outputs rather than Input
3.7.4 Competition
3.7.5 Contract duration and Scope
3.7.6 Bid Costs
3.7.7 Borrowing Costs
3.7.8 Private Sector Management
3.7.9 Performance measurement and incentives
3.7.10 Contract Flexibility
3.8 Theme three: Advantages and Disadvantages to PFI
3.8.1 Advantages to PFI with UK Construction
3.8.2 The disadvantages to PFI within UK construction
3.9 Controversy debate against PFI
4.0 CHAPTER 4: DISCUSSION
4. 1 Introduction
4.2 Discussion
4.3 Summary
5.0 CHAPTER5: CONCLUSION AND RECOMMENDATIONS
5.1 Conclusion
5.2 Study limitations
5.3 Recommendations
5.3.1 Possible improvements to PFI Process

4. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
REFRENCES AND BIBLIOGRAPHY
APPENDIXES

5. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
LIST OF TABLES
Table 1.1: DifferencesbetweenPFIandtraditional procurement
Table 2.1: RiskstypesinPFIprojects

6. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
LIST OF FIGURES
Figure 1.1: The difference inpublicpaymentsbetweenPFI&Traditional Procurements
Figure 1.2: Guide to the Content
Figure 2.1: MethodologyFramework
Figure 3.1: Literature reviewstructure

7. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
ABSTRACT
In the 1992, the PFI was introduced aiming that to increase engagement of the private sector expertise
in providing public services. Hewowell and Pollock (2009) claimed that, there were 627 PFI schemes
have been signed in March 2008 for developing private finance of £58.2 billion. The main purpose of this
research was to examine whether or not PFI can offer VFM to the public sector in UK construction
industry.
A secondary type of research in a form of in-depth critical analysis of the subject matter has been
undertaken through a literature review in order to examine the current research aim and objectives as
well asinvestigateitshypothesis.
Through this in-depth critical appraisal of the literature review, the author had realized that the ‘’PFI
does offer VFM’’ to the public sector within the UK construction industry through number of different
correlated factors; for instance, risk allocation to the private sector, huge cost and time certainty,
competition in the tender process, facilities management (FM), improved design, integration of whole
life cycle costing, improved management, Contract Flexibility and Borrowing costs…etc. Additionally, the
present study also investigates the advantages and disadvantages of PFI process, structure and history
of PFI, stressed the notion lie behind VFM and risk allocation, possible improvements to PFI process
were alsohighlighted.

8. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
DECLARATION
No portion of the work referred to in the dissertation has been submitted in support of an
application for another degree or qualification of this or any other university or other
institute of learning.
Ahmed Jadelrab
2013

9. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
COPYRIGHT STATEMENT
I. The author of this dissertation (including any appendices and/or schedules to this
dissertation) owns certain copyright or related rights in it (the “Copyright”) and he has
given The University of Manchester certain rights to use such Copyright, including for
administrative purposes.
II. Copies of this dissertation, either in full or in extracts and whether in hard or electronic
copy, may be made only in accordance with the Copyright, Designs and Patents Act
1988 (as amended) and regulations issued under it or, where appropriate, in
accordance with licensing agreements which the University has entered into. This page
must form part of any such copies made.
III. The ownership of certain Copyright, patents, designs, trade marks and other intellectual
property (the “Intellectual Property”) and any reproductions of copyright works in the
dissertation, for example graphs and tables (“Reproductions”), which may be described
in this dissertation, may not be owned by the author and may be owned by third parties.
Such Intellectual Property and Reproductions cannot and must not be made available
for use without the prior written permission of the owner(s) of the relevant Intellectual
Property and/or Reproductions.
IV. Further information on the conditions under which disclosure, publication and
commercialisation of this dissertation, the Copyright and any Intellectual Property
and/or Reproductions described in it may take place is available in the University IP
Policy (see
http://documents.manchester.ac.uk/display.aspx?DocID=487), in any relevant
Dissertation restriction declarations deposited in the University Library, The University
Library’s regulations (see
http://www.manchester.ac.uk/library/aboutus/regulations) and in the University’s
Guidance for the Presentation of Dissertations.

10. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
ACKNOWLEDGEMENTS
In the name of Allah, the Most Gracious and the Most Merciful
Foremost, I would like to express my sincere gratitude to my advisor MR. JackRostron for his
continuous support of my MSc research, forhis patience, motivation, enthusiasm, and immense
knowledge. His guidance helped me in all the time of research and writing of this dissertation. I
could not have imagined having a better advisor and mentor for my MSc study.
My sincere thanks also go to Mr. David Sandra from the University language Centre (ULC) for
teaching me the summer pre-sessional English course which improved thoroughly my academic
witting.
Also I would like to extend my thanks to all the members of the staff of the Management of Projects
programme. Though their busy schedules, they always kept their doors open willing to help
enlightening our path withtheir invaluable advises.
I thank my fellow classmates for sharing their knowledge and ideas on how to write, collecting the
research data and structure the overall formatting for the dissertation.
Last but not the least; I would like to thank my family:my parents, forgiving birth to me at the first
place and supporting me spiritually throughout my life, my brothers, and sister fortheir
unconditional love and support.

11. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
LIST OF ABBREVIATIONS
Acronym Meaning
PFI Private Finance Imitative
BOO Build, Own and Operate
BOOT Build, Own, Operate and Transfer
DCMF Design, Construct, Manage, and Finance
BOT Build, Operate and Transfer
DBFO Design, Build, Finance, Operate
NPV Net Present Value
PPP Public- Private Partnership
O&M Operation and maintenance
VFM Value for Money
SPV Special Purpose Vehicle
PMI Project Management Journals
NEBC National Economic Development Council
JVs Joint Ventures
PFP Private Finance Panel
OGC Office of Government Commerce
NAO National Audit office
PFU Private Finance Unit
BSF Building Schools for the Future
PSC Public sector Competitor
OJEC Journal of European Community
NSWG New South Wales Government’s
CAPEX Capital Expenditure
FM Facilities Management

12. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
CHAPTER 1
INTRODUCTION
CHAPTER 1
INTRODUCTION
1.1 Overview
Private Finance Initiative (PFI) is just a form of Public Private Partnership (PPP) where the liability of
providing public services is transferred from the public sector to the private sector under a concession
agreement. It is also ways of utilizing skills and private finance to deliver capital investment projects
where traditionally offered by the public sector. PFI is often used in the UK construction industry where
BOO (Build, Own and Operate), BOOT (Build, Own, Operate and Transfer), DCMF (Design, Construct,
Manage, and Finance), BOT (Build, Operate and Transfer) and DBFO (Design, Build, Finance, Operate)
are usedelsewhere.
Globally, the demand for applying PFI procurement mechanism was initially driven by the need for
private sector innovation and/ or to finance an infrastructure projects in design and managing
infrastructure projects and public sector facilities. The high demand for infrastructure projects and the
pressures on national budgets are the main rationales lie behind the governments encourages the
private sectorinvestmentininfrastructureprojects.
In PFI deals, the private sector finance, develop, and maintains the assets used in the public services’
delivery. While, on the other hand, the public sector pays a unitary charges or monthly fees which
covers both the ongoing service costs and the repayment of the capital investment. This transforms
governments from being operators and owners of the assets to purchasers of the services. The key
principlesof PFIare:
 Value formoney
 Servicespurchase notassets
 Private sectorknow-howandexpertiseutilization.
 Whole life-cycle costingincorporationininfrastructureprojects.
 Riskmanagementbetweenpublicandprivate sectors.
According to (Bing et al, 2005), a study reveals that only 15% of construction cost and 13.20% of the
operation Net Present Value (NPV) cost of the fifty-three (53) PFI projects were surveyed less than £10
million. This sort of contractual arrangement in PFI deals requires kind of special financial and
managerial requirements which add a substantial complexity to the parties involved, agreements,
arrangementsandthe long-termengagement.

13. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
1.2 PFI procurementmechanismvs. Traditional route
There are number of Contracting structures and procurement approaches other than PFI been used as
risk allocation tool to tackle the risk of time overrun and construction cost to the private sector
contractor, forinstance,eitherthroughturnkeycontractsorthrougha fixed-price.
Since 1990, there are several contractual arrangements were developed considering the private sector
involvement in the project delivery as well as risk allocation. These are; for instance, DBMO (Design
Build Maintain Operate), DBFM (Design Build Finance Maintain), DBFO (Design Build Finance Operate),
BOO (BuildOwnOperate) andBOOT(BuildOwnOperate Transfer) (HMTreasury2008).
It has been argued that by Takim (2008), there are two main critical success factors in PFI deal such as
value for money and long-term contract duration. However, the main negative factors for adopting PFI
deals are the confusion of project objectives and its financial mechanism. He also persuaded that the
main difference between the traditional procurement and PFI procurement system is on asset
maintainability. According to world-wide trend asset maintainability is better addressed under PFI
procurementratherthanintraditional one.
Therefore, the selection of PFI procurement process must be always base on providing value for money
and risk allocation when compared with all other procurement mechanism routes within PPP format
(Pittetal 2006).
Design and construction phases of PFI deals become fully integrated up-front with asset management
and operations. Operation and maintenance (O&M), refurbishment cost and ongoing service delivery
become a responsibilityforasingle partyoverthe concessionduration.
In response to these events, PFI bidding cost is considered to be substantially high. Both the private and
public sectors are required to recruit legal, technical and financial consultancies to ensure that the
project Value for Money (VFM) and affordability are in place. The advisory and bidding costs to both the
public and private sectors are range from £0.1-2.0 million, relying on the project size and type. Due to
the client awards the project contract to a competitor or not, the bidding cost of the contractor will not
be compensated.Therefore,the riskassociatedtothisisdeemedtobe high.
Moreover, a PFI unique feature to procurement is timing of responsibility and payments. Figure 1
clearlyrevealsthatthe private sectorpaysthe capital cost whichitrecoversbythe service payments.

14. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
Figure 1.1: The difference in public payments between PFI & Traditional Procurements –
Source: Ahadzi and Bowles, 2001
The public sector procures, on the contrary, pays for the service over the operational period, but it
rather does not pay the capital over the construction duration. Furthermore, the public sector specifics
the design services by means of an output specification, but it does not take responsibility of the design
itself. Furthermore, the public sector operator monitors the service performance and delivery rather
than operating the assets. Table 1 clearly shows the differences between the traditional procurement
and PFIone.(Refertoappendix -a).
1.3 PFI Parties
PFIContracts typicallycomprise threemainpartiesasfollows:
 The Special Purpose Vehicle (SPV): A limited company which represents the heart of PFI projects,
and it is often called the project company (or the project consortia). It acts as the management
and operating company for the project, and is the legal owner of the contract period that
grantedby the publicsector.
 Thirdparty-funders:forinstance,bonds,banksdebt,equity…etc
 The Awarding Authority: this is where the public sector client is responsible for procuring the
project. For instance, local authority, or government agency and central government
department.
1.4 Risks types inPFI projects
A risk is ‘’an uncertain event that, should it occur will have an effect on the achievement of objectives. It
consists of a combination of the probability of the perceived threat or opportunity occurring, and the
magnitude of itsimpacton objectives’’.

15. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
Construction is a process which governed by complex contracts as well as there are number of risks
associatedwithanditcontainscompletedrelationsacrossmanylevels.
The types of risks in PFI projects as defined by the UK Treasury Taskforce is shown in Table 2 (refer to
appendix -b).
1.5 Rationalesto undertake this study
According to Fryer (2004) PFI is just a form of PPP which describes a general term utilized to reveal the
relationship between the public sector and the private one with an objective to use the private sector
expertise and / or resources in order to deliver and supply public sector services and assets. Akintoye et
al (2003) is often argued that a PPP is a combination of the public sector’s resources, for the sake of
more efficientservice provision.
Kee and Forrer (2008) persuaded that the UK governments historically had provided public sector
facilities and services by a traditional capital financing mechanism which it has depended on tax incomes
and borrowinginorderto fundpublicprojects.
According to Fox and Trott (1999), however, there has been a sudden shift in following government’s
method to public sector procurement over the past two decades, as the private sector assuming full
responsibilityfordesign,operation,maintenance,management,constructionandfinance.
Allen (2001) claims that, the PFI was initially introduced to the UK in 1992, by the then Chancellor of the
Exchequer Norman Lamont for the purpose of increasing the participation of private sector expertise
withinthe publicservice’sprovision.
Dixen et al (2005) explains that the involvement of private expertise in the public works was a result of
PFI introduction to encourage investment within fading infrastructure projects. Therefore, both the
public services and infrastructure had become decrepit. As a result, this situation had become basis of
political significance. In response to thisevent, Kee and Forrer (2008) claims that PFI then was utilized as
an innovative approach of funding public infrastructure projects including prisons, roads, hospitals and
schools,while othergovernmentsrunfacilitiesthroughinvolvingprivate capitalinvestment.
PFI aims to facilitate new form of partnership between the private and public sectors for the sake of
gaining benefits and profit for all. RICS (1995) argued that, PFI’s substantial rationale is risk allocation to
the parties best able to appraise it and manage it (private sector), bring the private sector into the
public capital asset’s operation and connecting management skills of private sector, which all these
resultsinan improvedqualityof servicesandassets.
Morledge et al (2006) asserted that PFI was implemented aiming that to change the approach how both
services and infrastructure were often to be provided to the British public economically and proficiently.
According to Hood (1995), PFI was implemented to form a part of an ongoing universal trend of new
public management, in which governments play the role of private sector by developing tasks definitions
as to be achieved through government’s professionals. Broadbent and Loughlin (1999) illustrate that

16. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
how PFI purposed to bring private sector expertise and entrepreneurship and market forces to the
publicsectorto reinforce it.
Gallimore et al (1997) claims that the main aim of this initiative was to increase both cost effectiveness
and value for money to the public sector. Swaffiled and McDonald (2006) are also claim that as
mentioned earlier, in order to provide benefits and profit to all participants the process should involve
the creationof newcontractual relationshipbetweenthe private andpublicsectors.
PFI contains both the client approving and controlling the process and the main contractor who
managing both the project’s construction and design phases. Risk allocation is a vital rationale of PFI,
and it is substantially vital that the right transfer been allocated/ or shared between parties in order to
accomplishanoptimumValue forMoney.
Swaffield and McDonald (2008) emphasizing that value for money over PFI life cycle process is vital to
the whole project’sprofitability.
Accordingto HM Treasury(2003) documentsthat:
"The government aim in procurement decision making is to secure the maximum improvement in public
services from investment through maintaining an unbiased stance on which procurement route will
offervalue formoneyineachcase".Pg no.78.
The quotation clearly reveals that the UK governments view VFM is a vital aspect. Pitt et al (2006);
however, explained that issues of risk and conflict of intersect could be arise when both the private and
publicsectorappraise value formoneyinthe processinresponse totheirowninterestsandpositions.
Hewowell and Pollock (2009) claim that, at the contemporary, PFI represents the heart of UK
government practice, as in March 2008, 627 PFI schemes have been signed to develop a private funding
of £ 58.2 billion.
According to Ball and King (2006), value for money is a substantial rationale over the whole scheme
assessment in terms of both present and past success. In response to this event, taking mainly into
account risk allocation, PFI could offer a flow of services that are equal in quality been provided by the
public sector, though at lower total cost or at the same. Ball and King (2006) claim that due to financing
costs and bidding process will certainly be highly costly; therefore, important savings must be made
throughoutthe whole lifecosting,riskallocationandinnovation.
HM Treasury (2003) defines VFM as: "the optimum combination of whole life costs and quality (or
fitnessforpurpose) tomeetthe userrequirement".Pgno.30
Heald (2003) argued that PFI could only be utilized as a preferable procurement approach, if and only if
consideredtoprovide anoptimum VFMasmeasuredagainstitscounterpart.

17. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
1.6 Purpose of the research
The purpose of this study is to investigate whether or not the PFI provides value for money to the public
sectorwithinUK constructionindustry.
1.7 Hypothesis
‘’The Private Finance Initiative (PFI) does offer value for money to public sector Construction projects
withinthe UK’’.
1.8 Research Aimsand Objectives
The primary aim of this research will be to either prove or disprove the hypothesis aforementioned
above which is to determine if PFI provides value for money to public sector within UK construction
Industry.The mainobjectivesof thisstudywill be:
 To examine the structure and nature of PFI in UK construction projects and investigate why it
was hostedinthe UK inparticular.
 To underline the fundamental rationales of PFI implementation in construction industry of
providingvalue formoneyandrisktransfer.
 To define whatismeantby‘value formoney’withinPFIdeals.
 To define the advantagesanddisadvantagesof usingPFIinconstructionprojects.
 To propose possible solutionscouldbe made tothe PFIprocesswithinUKconstructionindustry.
1.9 Scope and Limitations
The aim of this study is to examine either prove or disprove the hypothesis aforementioned above
which is to determine whether or not PFI provides value for money to public sector within UK
constructionindustry.
Research approach is desktop/ qualitative where a secondary data were attained from the public
domain. Information obtained from the public domain for instance, companies’ websites tend to be
insufficient and biased. Author nominated to follow the study by investigative such methodologies due
to the limitationswithinattainingtheseinformationbyothersources.
Quantitative study method would have extended the qualitative analysis and attained more reliable
findings. Literature review is devised to probe into the current status of the Public Private Finance
Initiatives (PFI) applications in the UK Construction industry with the vision of generalizing the findings
to the wider industry. Yet studied case study and literature are not considered complete enough to
representthe entire industrydue tosome time constraints.
Due to the fact that PFI’s case studies which reveal Value For Money (VFM) evaluation were covered
through highly confidential agreements with companies’ procuring Authority, therefore going through
in-depth critical analysis of them is highly challenging and difficult or might deemed to be as constraint
to the current study. Because of this, this study methodology employed will only comprise a secondary
researchina formof critical analysisof literature review.

18. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
Finally, this study is onlyfocuses onintensive desk-top analysis to PFI applications in the UK construction
industryratherthanphysical ones.
1.10 Guide tothe Content
1.10.1 Chapter 1: Introduction
This chapter provides a brief overview of PFI as compared to other traditional route and it outlines the
logic behind the current examination as well as laying out the study‘s aims and objectives. The rationale
sectionclearlyrevealsthe articulationfor the rationalesforundertakingthisstudy.
1.10.2 Chapter 2: Research Methodology
This section will define the methodology used for the secondary research data collection within the
currentinvestigationinordertoassistineitherprovingordisprovingthe aforementionedhypothesis.
1.10.3 Chapter 3: Literature Review
This section examines both past and present literature providing secondary research within both
academic and industry in order to explore in depth the aims and objectives laid out in chapter 1. This
chapter gives a depth into the intricate workings of the PFI within the UK industry from inception to
presentday.
1.10.4 Chapter 4: Discussion
This chapter articulates the literature review findings and how it enforces the research aim and
objectives. It further reveals and scrutinizes the research findings obtained from the literature review. It
further answers the research questions through rigorous analysis of the literature review of the subject
matter.
1.10.5 Chapter 5: Conclusionand Recommendations
This chapter recaps research findings and highlights its study limitations as well as it provides a list of
possible improvements to PFI processes that remedy its associated problems highlighted in the
discussion.
Figure 1.2 clearlyrevealsthe overall flow chartof the guide tothe content

19. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
CHAPTER 2
RESEARCH METHODOLOGY
CHAPTER 2
RESEARCH METHODOLOGY
2.1 Introduction
The methodology in the current examination will either be utilized to disprove or prove the above
mentionedhypothesisaswell asaddressingthe studyaimsandobjectives.
The secondary research in the current investigation has been carried out in both the Literature review
and discussionsections.
Due to the fact that PFI’s case studies which reveal Value For Money (VFM) evaluation were covered
through highly confidential agreements with companies’ procuring Authority, therefore going through
in-depth critical analysis of them is highly challenging and difficult or might deemed to be as constraint
to the current study. Because of this, this methodology employed will only comprise a secondary
researchina formof critical analysisof literature review.
Secondary research involves the collection of data from either the originator or distributor of existing
research.Thusit isthe assessmentof informationalreadygathered.
Within the present study the secondary research has been employed in order to provide the reader with
an in-depthunderstandingintothe workingsof the PFIwithinUKconstruction.
According to Yin (2003), research is a methodology that has structured method for gathering and
collecting information which enables the researcher to respond to specific hypothesis. It also concerned
with the techniques and tools for conducting a research. The word research is often and widely been
utilized for examinations intended to enhance the knowledge edges and to reveal or discover new
interesting facts. Walliman (2011) claims that as the efforts in all activities considered will be reflected
on the output’s caliber. Therefore, a detailed study method should reach an undoubted and valid
conclusion.
2.2 Types of Research
Panneerselvam (2004) explains that the choice of research design depends on what kind of problems
study aims would deal with. Each type of it is formulated to cope with a particular range of research
approaches which are often used to critically analyze a generated data through examinations. There are
numberof commontypesof researchdesignsasfollows:

20. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
2.2.1 Experimental research: it is used to investigate the effect of factors on the system response
variable thatisunderstudy.
2.2.2 Analytical research: it is an attractive to the descriptive sort of research through describing and
criticallyanalyzingaphenomenon’soccurrence.
2.2.3 Exploratory research: it is a sort of research is conducted when there is no or few of previous
studies or knowledge on the problem. Its main objective is to explore relations between
different variables with no specific end-objectives. Its types are for instance, literature surveys
and experience inordertogaininsighttothe problem.
2.2.4 Descriptive research: it depends on method of collecting information as well as observations
made. It studies situations where trying to create the norm; for instance, what could be
estimated/ or predicted under the same circumstances. These observations could present
different forms depending on the people who are interviewed, video and audio records are
made, questionnaires are distributed, and the information’s nature that sought. However, it is
vital that these observations should be recorded and noted down for the sake of analyzing them
successfully.
2.3 Research Method
Researchapproachescan be classifiedintotwodistinctmethodsasfollows:
2.3.1 Qualitative research:
Qualitative research method on the one hand, contains gaining understandings and insights into
people’s opinions. It is often rely on subjective data items which can not be formulated in numeric
values; for instance, the perceptions and attitudes of a range of individuals on an aspect. These would
be revealedinwordsratherthanstatistical generalizationsandnumbers.
2.3.2 Quantitative research:
While Fellows and Liu (1997) on the other hand, illustrated that quantitative methods comprises the
collection of factual data for the sake of studying relations between how relations and facts comply with
theories and facts. It is often relying on empirical, measurable and statistical data as well as it relies on a
scientific approach which aims to be as objective as possible. Conclusions made form it will be tolerated
fromanalysis.
2.4 Primary and Secondary Data
Data is classified into two main types depending on their closeness to the event recorded. Observed,
recorded and experienced data near to the event are named as primary data. In contrast, written
sources interpret primary data are called a secondary data. According to Blaxter et al (2006) on the one
hand, secondary sources of data comprises articles, journals, textbooks, critical analysis essays and
biography; while on the other hand, primary data involves diaries, original hand written manuscripts,
questionnaires,interviews,speechesandcameraortape recording.

21. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
2.5 SelectionofResearch Approach
The researcher decides to undertake either quantitative or qualitative desk-top research method with
case studies as a secondary source of data base on the study’s requirements. There are substantial
rationales lie behind undertaking research through using case studies; for instance, they undertake
multiple evidence’s sources, they are not isolated variables as they consider multivariable conditions,
and they define study’s topic wide concept. Yin (2002) therefore, claims that understanding of the
relevant topic and knowledge advancement as well as initial concepts would be developed at the
beginningof the case study.
2.6 Data Collectionforliterature Review
There are substantial rationales lie behind undertaking literature review such as it offers an introduction
to the study project, it represents a vital part of the dissertation and it underlining an argument why the
research is worthwhile pursing. Walliman (2011) persuaded that the main aim of literature review is to
clearly understand where the research fit in the subject framework and how developing an obvious
picture of the relevantstudy’stopic.
2.7 Data collectionfor case studies
Yin (2003) argued that when a phenomenon under research could not be differentiated from its context
then the selection of a case study would be an optimum method of research. According to Cohen et al
(2000), case study is usually examining the features of individual unit to analyze the phenomena under
focus with a mission to establish a broad population of generalization to which the unit belongs to.
Moreover, Mikkelson (2005) emphasizes that due to the fact that case studies should be connected to a
theoretical framework for the sake of generalization’s foundation; as a result, case study tends to reveal
special cases. Though,selectingcritical casescouldresultingeneralizingthe chosencase studies.
Cousin (2002) claims that, in order to increase the insights of the subject under scrutiny in its own
habitat the study focus should be in “naturalistic setting”. In response to this event, Yin (1994) claims
that, case studyis a methodforinvestigatinga phenomenoninaphysical context.
2.8 Discussionand Recommendations
The notion lies behind Study discussion is to conclude and view findings as well as highlighting any
aspects about project management perceptions. According to Bell (2005) “a hundred separate pieces of
interesting information will mean nothing to a researcher or to a reader unless they have been
categorizedorinterpreted”.
Research findings will determine the areas which require more research to be undertaken as well as
revealingthe identifiedgapsinthe subjectmatter.
2.9 Search Strategy
The research is concerning about analyzing and investigating the usefulness of Public Private Finance
Initiatives (PFI) for procuring large infra-structure projects as compared to the traditional route.

22. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
Furthermore, the study will be focusing on whether or not PFI provides value for money to the public
sectorwithinUK constructionindustry.
Research main focus will be on determining whether PFI provides value of money to the public sector or
not. Followedstepsforthe researchare as follows:
 Reviewthe fundamental feature of PFIcontract.
 To examine the advantagesanddisadvantageswithinPFIUKConstruction.
 Reviewthe currentapplicationof PFIprocurementprocessappliedinUKconstructionindustry.
 Reviewthe structure andnature of PFIconstruction projectsthroughitsliterature review.
 Investigate the fundamental rationalesof PFIof providing‘value formoney’and‘risktransfer’.
 Investigate/ or recommend possible improvements/ or solutions could be made to the PFI
processwithinUKconstructionindustry.
2.10 Keyword
PFI, ‘Value for Money’, ‘Construction industry’, ‘Risk allocation’, Facilities management and Infra-
structure projects.
2.11 Sourcesof information
Keywords such as PFI, ‘value for money’, ‘risk allocation’, assets management, and Infra-structure
projects were used as search criteria. A secondary source of information forms the basis of the literature
and it comprises journals, books, academic papers and dissertations. Websites and internet search
engineswere alsousedasasecondarysource of information,suchas:
 Google (books,scholar).
 JohnRylandsLibrarylinkto databases.
 ProjectManagementJournals(PMI).
 ConstructionManagementandEconomicsJournals.
 HM Treasuryreports.
 AuditCommissionreportswebsite.
 PublicAccountsCommitteereportswebsite.
 Emeralddatabase.
2.12 RefiningSearch
Several unrelated data might be obtained while searching required information through identified
resources. As a result, to keep the research very focus in order to limit the obtained information to only
the wanted data or journals; approaches for instance; joining keywords together through using phrases
and timescale limitingwere used.
Moreover, in order to filter the obtained publications according to their relevance, an abstract has been
reviewed very carefully. Literature review samples were thoroughly chosen to cover different aspects of
PFI applicationin the UK construction industry. Finally, bibliography and references of papers of interest

23. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
were used for the sake of finding more articles or publications through direct link to the subject matter.
Figure 2.1 clearlyrevealsthe overall researchmethodological framework.
Figure 2.1: Methodology Framework
INFORMATION
ANALYSIS
AIM& OBJECTIVES
QUALITATIVE STUDY
LITERATURE REVIEW
DISCUSSION
CONCLUSION AND
RECOMMENDATIONS

24. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
CHAPTER 3
LITERATURE REVIEW
CHAPTER 3
LITERAURE REVIEW
3.1 Introduction
In order to examine the various issues of the PFI processes in UK construction industry, therefore, this
chapter articulates three main themes. Fist theme, tackles the History and structure of PFI. While the
second theme, reveals the notion lies behind Value for Money. Finally, the third theme defining the
AdvantagesanddisadvantagestoPFIwithinthe UKconstructionindustry.
The three themes are all gathered for the sake of providing a comprehensive review to this research
whichgrantee a betterunderstandingforthe reader(Figure 1.3).
Figure 3.1 reveals the literature review structure (History of PFI, Value for Money, Advantages and
disadvantagestoPFI).
Figure 1.3: literature reviewstructure
Advantages
&
disadvantag
estoPFI
History
of PFI
Value
for
Money

25. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
3.2 Overview:
Dixon et al (2005) persuaded that, traditionally the provision of both services and public infrastructure in
the UK construction industry was that of government. According to Fox and Tott (1999); however, there
has been a massive change over the last 20 years in successive government’s method in procuring public
sector with the private sector achieving greater obligation for issues concerning design, construction,
finance, maintenance and operation and maintenance (O&M). Kerr (1998) claims that, the public sector
has taken on the role of both services’ regulator and the consumer as a result of developing this
procurement strategy. Dixon et al (2005) explained that, the public sector has been driven to
outsourcing property and other related services by increasing number of financially free standing
infrastructure projects, compulsory competitive tendering and the privatization’s initiation. The vital
resultof thisprogressionhasendedinthe creationof the PFI.
According to Allen (2003), the PFI was advertised in 1992 by the then Chancellor of the Exchequer,
Norman Lamontaiming to increase the private sector participation in providing public services. Kee and
Forrer (2008) claim that with respect to since then the dilapidated situation of British public services and
infrastructure, the PFF wasintroduced to the UK by the political necessity. Therefore, PFI was applied as
a new innovative approach of funding a project through capitalized social infrastructure by involving
private capital toinvestininfrastructure projects.
Kee and Forrer (2008) defines PFI is just a form of Public Private Partnership (PPP) as "an arrangement
between a government and the private sector in which partially or traditionally public services are
performedbythe private sector". Pgno
The PFI isdefinedas:
IPEA (2000) defines PFI as "The financing of long term infrastructure and public services based upon a
non-recourse or limited financial structure where project debt andequity used to finance the project are
paidback fromthe cash flowgeneratedbythe project". Pgno.
The PFI involves long-term contractual arrangement between the private sector and public clients to
facilitate assets; for instance, roads, prisons, hospitals and schools etc. Ball et al (2003) claim that under
PFI scheme the private sector is accountable for operating and maintaining (O&M) the project as well as
designingandconstructingit.
The private sector in the most commonway of PFI is commissioned to design, build, finance and operate
(DBFO) a facility relied on ‘’o/p specifications’’ delegated through the public sector top management. In
order to safeguard VFM in the use of public resources, these projects need to gain a significant risk
allocation to the private sector through this criterion before they will agree. The public sector under PFI
does not possess any assets, though; instead of this it pays the contractor a stream of regular unitary
charges (revenue payments) for the facility’s usage over the contract duration. Allen (2003) claims that,
upon the contract’s completion the asset’s ownership would either revert to the public sector or remain
withthe private sectorrelyingonspecificcontract’stermsandconditions.

26. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
3.3 Theme one: History of PFI: Past and Present
3.3.1 Before the PFI
Roy (2008) claims that, governments have been unwilling before the introduction of the PF in the UK
construction industry to permit private money for funding infrastructure projects as his position has
beenearlier laidoutinthe Ryrie Rules.
3.3.1.1 The Ryrie Rules:
They were formed in the 1981 by the National Economic Development Council (NEBC) working party
under the leadership of the Sir William Ryrie the then Secretary to the Treasury. They were also shaped
to establishorsetouta criteriononhowthe private finance canbe introducedintonational industries.
The Ryrie Rulesstated
1- HC Dep (3639) persuaded that, any sort of financing investments decision should be carried out
under fair competition’s circumstances with the private sector borrowers; any dominated power,
government commitments or guarantees and links with the rest of public sector should not
effect in the schemes providing investors a degree of security greater than this private sectors
projectshave.
2- HC Dep (3639) also argued that, such projects should produce benefits in terms of profit and
enhanced efficiency from an additional investment appropriate with raising risk capital’s costs
fromthe financial markets.
In the House of Commons – Treasury report -Fourth Report (2000); however, quoted that, these rules
have been usually recognized for the sake of having little rewarding and incentivizing from the private
financing.
In response to these events, Allen (2003) explained that, these rules were studied for the sake of
considering the introduction of schemes, for instance, partnership and contracting- out schemes as well
as the privatization of previously nationalized industries. Therefore, there are two main principles of
these studiesasfollows:
 Government had considered the privately funded projects for infrastructure projects in its
publicexpenditure planning.
 Private fundingcanonlybe hostedwhere itprovide costeffectiveness.
In May 1989, Ryrie Rules were legally designated by the then chief secretary of the treasury John Major
based on that they had outlasted their usefulness. The rationale lie behind this is that the then
conservative governments were willing to stimulate funding infrastructure projects through involving
the private sector which provide VFM to both tax payers and users. Petratus (2005) claimed that, due to
the fact that Ryrie Rules were required both substantial risk and cost effectiveness from the private
sector, therefore they deemed to be failed. Therefore, the Ryrie Rules retirement in the 1989 aimed to

27. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
improve such criteria; for instance, stimulating market innovation and extension as well as reducing
private sectorrisk.
3.3.2 The birth of the PFI
In the 1992, the Norman Lamont stated that in response to the redundancy of the above mentioned
Ruleshave tobe changedas itsaidbelow:
‘’I have said speech in my castle house that I were investigating approaches on how to increase the
private funding for infrastructure projects. Clearly, I would like to emphasize on the notion lies behind
ensuring functional investment decisions as well as tax payer’s interests have been safeguarded
whenever chances were arise. As of now I am capable of advertising three major improvements as
follows:
First, previously Governments were only ready to start private deals when comparing them with similar
public ones. Any privately financed deals would generate profits in the future will be continued and
permitted. Second, government was previously treated proposed projects as either entirely public or
entirely private. Government in the future will stimulate joint ventures (JVs) with the private sector
where itcouldestablishaproperriskallocationtothe private sector.
Third, we will permit massive usage of leasing where it provides VFM. As been cited by HC Dec
(1992),this could only be valid if lease payments counted as spending as well as without their capital
being removed, private sector kept holding risks and public companies will be capable of entering
operatinglease arrangements.
In response to these events, Swaffield and McDonald (2006) claimed that, PFI aim is to develop new
form of Joint ventures (JVs)/partnership between the private and public sectors to gain benefits and
profitstoboth parties.
Allen (2003) cited that, PFI goals are similar in nature to Ryrie Rules which both are highly capable to
offerVFMin usingpublicservicesaswell asrequiringthatriskhasbeenallocatedtothe private sector.
In 1993, PFI was to develop by appointing Kenneth Clark who performed to improve the process by
introducing Private Finance Panel (PFP). This panel was hosted for the sake of stimulating market
innovation by encouraging new ideas; work out on solving problems that might cause progress to be
blockedandidentifyingpublicsector’sareaswhere the private sectorcangetinvolvedin.
HM Treasury (1995) persuaded that, in 1995, as PFI was given 9.4 billion lists of significant projects as
efficiently redevised by the conversations. Since government was not equipped to deal with PFI’s
concept successfully, therefore, the then financial secretary Michael Jack aimed to simplify the public
perception. HM Treasury explained that, as an implication of this anew PFI handbook has been
published named as ‘’ Private Opportunity Public Benefit, progressing the Private Finance Initiative’’
whichclearlyrevealslessonslearntfrompreviousprojects.

28. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
3.3.2.1 PFI underthe Labour Government
Due to the fact the public-private partnerships (PPP) has been supported and continually prompted, the
government has made a substantial change in party policy in the 1997. This is due to the labours beliefs
that private sector was important for the sake of welfare increase as well as higher economic growth as
been persuaded by (Petratus, 2005). In response to these events; for instance, movement from
socialism values and organization nationalizations as well as policy changes were became successfully
‘’New Labour’’.
Though, upon supposing office the new government declared that Sir Malcolm Bates would conduct a
quick PFI review for the sake of analyzing and examining the process. HM Treasury (1997) claims that,
the first Malcolm’s review was ended at Mid June 1997 with 27 recommendations which aimed that
improving and streamlining the PFI projects delivery. As a result of this, the PFI taskforce’s creation has
takenplace whichwasaimedto assistthe governmentwithPFIexpertise.
3.3.2.2 Treasury Task Force
It was initiated in Sept 1997, under the idea of assisting departments to set priorities while trying to
simplifynegotiations,appraisingandanalyzingspecifickeyprojects,andeventuallysafeguardingVFM.
3.3.2.3 PartnershipUK
A second PFI review was conducted in July 1999 by the Sir Malcolm Bates which stressed the important
recommendations that the Treasury taskforce be replaced with the ‘’Partnership UK’’ as permanent
organization. HM Treasury (1999) explained that ‘’Partnership UK’’ was shaped as a partnership
betweenboththe publicandprivate sectors.
The majority of the stakeholders within this organization would be the private sector with a board
chairman from the private sector. The public sector parties were seriously thinking very often about
whetherenteringintoPFIdealscanutilize ‘’PartnershipUK’’onavoluntarybasis.
Petratus (2005) argued that, Partnership UK was commenced to help government departments in
issuing and completing PFI templates guidance, help in offering VFM, stimulate trouble-shooting and
cooperate with treasury expenditure teams and others departments to develop the next PFI project
generation. Due to the fact that the setup and nature of ‘’Partnership UK’’ was obviously totally
controlled by the private sector that is why PFI process is massively motivated by the private sector with
respectto marketwiththe governmentrepresentation.
3.3.2.4 The Office ofGovernmentCommerce (OGC):
A Procurement review in central government has taken place in July 1999 by Peter Gersham which
resulted in creating the OGC. Gersham (1999) persuaded that, therefore, the treasury taskforce then
policy arm is replaced by the OGC aiming that government’s procurement would be improved and
modernized.

29. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
The structure of the OGC is well structured so that it directly reports to the Treasury chief secretary.
Allen (2003) cited that the OGC is made up of permanent secretaries comprises the OGC’s chief
executive, National Audit office (NAO) head, external and senior representatives and all under a
supervisory board chaired by the chief secretary. Until 2003, as been persuaded by Roy (2003) The
Private Finance Unit (PFU) in the OGC was accountable for promoting and delivering PFI polices for
publicentitieswhenitwasreplacedbythe formationof the HMTreasuryPFU.
3.3.2.5 HM Treasury Private Finance Unit (PFU)
Till April 2003, as been mentioned earlier the PFU in the OGC was accountable for both providing and
delivering PFI policies to public entities. Though, the PFU in the HM treasury took over in 2003, which
safeguardedthe followingresponsibilities:
 Owningthe Projectreview group.
 Authorityandcontrol overPFIstatistics.
 AccountabilityformanaginggovernmentframeworkarrangementinpartnershipUK.
 Owingthe PFIContract’sstandardization.
 Legislativecontrol overgeneral PFIpolicies.
3.3.2.6 Public-Private Partnerships(PPP) Programme:
The PPP programme was established by the local authority associations in April 1996 in Wales and
England which was applied to help local government with delivering projects. Therefore, the local
authorities works in tandem with the PPP programme to ease some aspects; for instance, implementing
and procuring PFI schemes, complex programmes and projects, public partnerships and accelerate
developmentaswell asfacilitate financing.
3.3.2.7 Meetingthe InvestmentChallenge:
Government was produced a policy document in 2003 elaborating the government’s strategy to PFI,
proposing investments to both helping projects delivery’s as well as the process of addressing VFM and
settingupnewrestrictionsonPFIsuitable usage.
3.3.2.8 VFMAssessmentGuidance:
In the 2004, Treasury published guidance on appraising VFM on PFI transactions, which is updated
consequentlyin2006.
3.3.2.9 BuildingSchoolsfor the Future (BSF)
The BSF initiative was introduced in the 2004 in order to enhance the PFI delivery model as well as non
PFI schools which was formerly undertaken through a body named ‘’ Partnership for schools’’. Though,
inthe 2010 whenintroducingthe newelectedstate,thissystemhascurrentlybeeneradicated.
3.3.2.10 Reform of the Project Review

30. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
It was introduced as an approval mechanism for local government deals in the 1998; then, prior to the
appointmentof apreferredbidderPFIwasreformedtointroduce the secondstage review inthe 2005.
3.3.2.11 StrengtheningLong Term Partnerships
Bourn (2007) claimed that, there was a document produced in the 2006 which revealed several aspects
in the PFI procuring projects; for instance, strengthening PFI development, reconfirming that projects
need to be accurately developed prior to market them, enhancing procurement skills and greater
analysisandexaminationof projectsbeforeprofferingbiddersystem.
3.4 Structure of PFI
Grout PA (1997) explainedthe fundamental rationaleslie behindPFI’susage suchasfollows:
 The projectmust clearlyreveal toprovide VFMtothe tax payer.
 A large amountof riskshouldbe allocatedtothe private sector.
 The contractual arrangement should relate to the service’s consumption rather than the asset,
and the financingshouldbe mainlyprovidedbythe private sector.
Therefore, Pitt et al (2006) argued that the choice of PFI as a procurement approach must be made
basedon offeringbestvalueformoneywhencomparedwithall otherprocurementcounterparts.
It is often argued by Fox and Tott (1999) a PFI is usually executed by a consortium and commissioned
through an awarding authority. This awarding authority might be a local authority or government
agency or a central government department. It will be the public sector accountable for procuring the
project. Therefore, its objective is to accomplish value from the public money through risk allocation to
the private sectorwhichisassociatedwithofferingservicesandinfrastructure.
The PFI project’s consortium will form many different organizations gathered together to form a joint
venture (JV). These JVs are often called as Special Purpose Vehicle (SPV). According to Pitt et al (2006),
SPV has twodifferentadvantagesasfollows:
 Financingthe projectwithoutinvolvingthe wholecompanyinanyrisks.
 A companycouldhelponriskallocationtothe bestparties.
With regard to the PFI procurement structure, the consortium is assured to get a full return on cost, for
instance, an investment’s return and capital borrowing interest. These returns might include a
percentage of the service’s revenue or all cost. Basically, the flow of social services and procuring the
financial cost of the new social infrastructure should be done by the public sector over a concession
agreementtothe private vendor.
As mentioned earlier PFI deal will normally include both the private sector consortia set up to build and
bid for the project and the public sector agency which conducts the procurement. Kee and Forrer (2008),
however, claim that the bank/ or any financial institution who raised the fund would always be the third
spoke inthe wheel.

31. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
Kee andForrer (2008) persuadedthatPFIprocesscomprisesthe followingaspectsasfollows:
 Publicservice’ssupply
 Contract negotiationwiththe chosenbidder.
 The constructionby the private sector.
 Negotiationandtenderingprocesscontainingdetailedspecificationswithfirms’shortlist.
 The appraisal by the public agency of the applicability of PFI process and the definition and
establishmentof serviceneed.
As stated earlier by Pitt et al (2006) that in order to enable PFI providing the tax payer with VFM
prior to start physically the project, PFI has to go thoroughly through a well-defined 14 stage of
procurement process that has been developed continuously in order to emphasize on the notion lie
behindPFItrulyprovide valueformoney.
3.5 The ProcurementProcess
Stage 1 – Establish Business need: the public sector in this phase will discover whether there is a need
for change or not as well as if this change needs cost’s capital. For instance, a section of a hospital needs
replacementorrepairand/or NHSthinkingabouta hospital.
Stage 2- Appraise the options: the client in this needs to commence an intensive research to look after
what skills and resources they have, what advice is available and if there is any similar projects have
been before undertaken. It will also need to define their output specifications. At this stage an
assessment option should take place to examine approaches of accomplishing objectives and thought
shouldbe giventoaffordabilityandcost.
Stage 3- Business case and reference project: This is when an investment chance is seen to be cost-
effective and realized then the notion lie behind PFI should be examined. Therefore, an outlined
businesscase shouldbe generatedaswell asassessingwhatispossible.
In response to this, a similar case study of a project should be studied to analyze whether or not the
current project could be profitable. The Public sector Competitor (PSC) should explore an unbiased ways
of delivering the o/p specification without using PFI in terms of money. In response to these events,
during this stage a risk workshop should be carried out in order to define comprehensively all risks
associated.
Stage 4 - Developing the Team: In this stage organization’s procurement is set up and its team’s
responsibilitiesandroleshave beenidentified.
Stage 5 - Deciding tactics: It is highly substantial in this stage to set up a clear methodology reveals what
and when needs to be accomplished and an appraisal into market sounding should be undertaken as
well.The final tenderinglistshouldbe concise tothe leastcandidatestomaintainhonestcompetition.

32. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
Stage 6 - Invite Expressions of interest: this phase represents a formal announcement of Contract
procurementonthe Journal of EuropeanCommunity(OJEC).
Stage 7- Prequalification of bidder: the interested list of companies who willing to undertake the
current project have been collected from OJEC and then appraise their capability of doing it through
theircompanyprofile,CVsandrelatedyearsof experience.
Stage 8 - Selection of bidders: in this stage a short listed competent contractors have now been formed,
in which it can be done either through formal pre-qualification or a ranking system of every supplier that
meet the minimum standard and then carrying out a win proposals. On the other hand, suppliers who
are failedtobe selectedshouldbe questionedforthe sake of feedback.
Stage 9 - Refine the appraisal: In this stage an original evaluation to the project should re-examine
based on knowledge have gained so far before setting up invitations to negotiate for the successful
companies. An accounting treatment, funding obligations as well as affordability should be re-confirmed.
Stage 10 – The invitation to negotiate: Invitation to companies to bid should be precise which include
the contractual conditions; for instance, payment mechanisms and contract length. It also comprises the
services required in terms of constrains on service scope and output, bids evaluation criteria, the extent
of encouraging bidders submitting their bids and the process and timing needed for bids submission.
Due to the complexity,thisstage takesbetweenthree (3) tofour(4) months.
Stage 11- Receipt and the evolution of bids: in this stage the project’s team must appraise bids been
receivedearlierinresponsetothe criteriaearlierspecified.
Stage 12 - Selection of preferred bidder and the final evolution: PFI process should be examined
against the notion lie behind affordability criteria and VFM upon choosing the preferable bidder. With
reference to PSC, the accounting officer will need to compare the preferable bid’s cost with this
affordability.
Stage 13- Contract award and Financial Closure: In this stage a Contract award notice released on OJEC
and itshouldbe signed.
Stage 14 - Contract Management: uponprocurementcompletionmanagingcontractshouldtake place.
Kee and Forrer (2003) often argued that PFI reference project and business case justification start at
stage three (3). It also begins at stage 9 and lastly at 12 when PFI hypothesis against affordability and
VFM have been examined. A PSC is introduced at stage 12 to examine the notion of VFM against the
preferable bidder’scost.
Treasury Taskforce Private Finance (1997) defines PSC as: "Hypothetical risk – adjusted costing, by the
public sector as a supplier, to an output specification produced as part of a PFI procurement expense".
Page no

33. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
According to Pitt et al (2006), when comparing PSC against the preferable bidder’s cost, it does not give
a real scenario of comparison as PSC is completed very early at stage three (3) while chosen the
preferable biddercomesatstage twelve (12).
3.6 The PFI Process:stopedhere
Roy (2008) claimsthata PFIprojectcomprisesfour(4) distinctphasesasfollows:
Procurement Phase – This contains the announcement in OJEC as mentioned earlier and the invitation
to negotiate withvariouscontractors.
ConstructionPhase – the successful SPV constructsthe assets.
Operation Phase– Kee and Forrer (2008) explain that SPV operates the services over a long-term
contract, and then it maintains this facility over a concession period (25-30 years) as the public sector
repays the debt as well as pays for the services. This is for the sake of ensuring that a suitable return on
capital borrowingisrealized.
Termination Phase – in this phase the asset either becomes terminated or returns to the private or
publicownershipandthe concession’s contractual service durationisfinished.
3.7 Theme two: Value for Money(VFM)
Alshawi (2009) persuaded that, the public service clients should ensure the followings in order to
emphasize thatthe publicsectorprocurementprovidesbestVFMasfollows:
 The expected Value for money offered by the public services is maximized through risk
allocationbetweenthe privateandpublicsector.
 Projectsare awardedthroughcompetingenvironment.
 Comprehensive, realistic and fair comparison scenario is held between the private and public
finance routes.
 Economic evaluation methods, for instance, an accurate risk appreciation are implemented very
rigorously.
According to The New South Wales Government’s (NSWG, 2001), the procedures for private financing
projectswhichlistthe maindriversforVFMare as follows:
 Innovation: broad incentives and chances for innovative solutions to provide requirements’
services.
 Improvedmanagementof risk:rigorousriskappraisal aswell asrisktransferto the bestparties
to manage.
 Assetusage:throughestablishingattractivechancestogenerate income fromthe assetusage
and applyingmore accurate designtomeetthe performance specifications,governmentcould
reduce itscost as a sole user.

34. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
 Due to designandconstructionbecome totallyintegratedup-frontwithassetmanagementand
operation,whole-of-lifecostingefficiencyandOwnershipisenhanced.Operationand
maintenance (O&M),refurbishmentcostsandongoingservice deliverybecome asingle party
obligationoverconcessionduration.
Pitt et al (2006) claims that, VFM appraisal, however it will obviously differ from stakeholder to another
that is why it is not an exact science. Therefore, both of the tax payer’s interest as well as the
commercial contractoroneswill have differentinteroperationsof whatconstitutesVFM.
According to HM Treasury (2003), VFMis defined as ‘’ the combination of whole life costs and quality to
meet the user requirement’’ pg no. In response to seeking VFM in the UK construction industry (Pitt et
al,2006) claimsthat,governmentshouldensure the followings:
 VFM should not be based on least cost. Therefore, the project overall life costing should be
takenintoconsiderationtoensure the optimumoverallprice.
 The terms and conditions of employees’ mobilizations and employment made by PFI contractor
shouldnotbe impactedbythe notionlie behindVFM.
 Full risk appraisal and a complete investigation of whole life costing and costs should be
undertaken.
 The process of examining the right route of procurement financial mechanism should be taken
without bias and with complete objectivity. Therefore, decisions would be made based on
evidence.
3.7.1 The importance of FacilitiesManagement
Sawffield and McDonald (2008) argued that, as mentioned earlier ensuring VFM during PFI process is
vital when attempting to establish an overall profit. Life cycle costing comprises the integration of O&M
information, design and construction and is of an utmost substantiality because of the length and nature
of PFI process. Therefore, the overall costs from inception to closure must be fully investigated if VFMis
forthcoming.
According to Sawffield and McDonald (2008), due to the fact that consortiums were engaged in O&M,
design and construction of the project, as result, the life cycle costing of successful management is of
utmost necessity. Flanagan et al (1989) asserted that life cycle costing includes O&Mcosts, initial capital
costs and the benefit or cost of the ending life asset. He is also defined it as an economic evolution
methodthatcontainsthe assettotal cost appraisal overitsoperationlife-span.
Davies (2004) claims that, for every five (5) units spent on maintenance there is a unit spent on capital
costs. Therefore, any life cycle costing developed as savings could be dramatic over the project
operation life. As a result, due to the PFI lengthy concession duration, there will be a substantial risk
exposed to the consortium. Also if there is any money has been lost; for instance, inadequate budget
has been dedicated to PFI bid’s maintenance then this it would be a great issue to the facilities
management(FM).

35. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
El – Haram and Agodiou (2002) argued that FM contractor in PFI has a vital role in the bidding process
for the appraisal andprovisionof servicestoensure anaccurate life cycle costing.
He is also argued that FM contractor should help in driving the design process and bid development
throughthe followingissuesasfollows:
 Assessing and reviewing the design from serviceability, maintenance operability and
maintainability.
 The choice and identificationof the idealoperational scenario.
 Engagementinthe designphase.
 ForecastingFMcosting.
 Improving FM cost break down structure which might involve maintenance and replacement,
operationandoccupancy.
 The choice and identificationof facilitiesreplacementstrategiesaswell asideal maintenance.
 For the sake of reducing FM costing as well as the whole life costing leasing with design and
constructionteamstochoose the most effective designroute shouldtake place.
He is further stated that, FM contractor should contribute in the delivery phase through the following
aspectsas follows:
 Engagementinthe designprocess
 The facilityavailability safeguarding
 Emphasizingthatthe service level neededismet.
 Controllingandmanagingthe operational costsandthe operational activities.
 Analyzingandgatheringof FM data forenhancement.
 Controllingandmanagingthe maintenance costsaswell asthe maintenance strategies.
Ball (1993) claims that, there are a number of life cycle costing decision tools exist in the construction
industry. Though, as persuaded by Kelly and Male (1993); several of these are often either not used
properly or ignored. For instance, net present value (NPV), annual equivalent value, internal rate of
returnand the discountedpayback.
It is cited by Kosky (2000), the possible elaboration of the aforementioned argument is that the benefits
of the accurate life cycle costing is not usually realized through a business over up to a year, that is why
the construction contractors might decide to tolerate the possibility of increased running costs and
future maintenance as well as reducing the initial capital expenditure (CAPEX). Therefore, VFM is
diminished due to this weakness in addition to some other substantial rationales; for instance, PFI
procurement is failed to forecast and meet the required facility’s life which results in effecting the
projectlong-runstabilityaswell asinfinancial risk.
Swaffield and McDonald (2008) concluded that, generally when procuring PFI projects contractors’
quality surveyors did consider the whole life cycle costing. Though, this is instead they were either

36. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
financially struggled or so busy in response to budget that life cycle costing were often ignored as
comparedto initial costs.
It was subsequently found that by this examination in these examples there were serious ramifications
for FM contracts within the increasing maintenance costs as compared to the allocated budget as well
as financial implicationsinresponsetorisk.
In order to either prove or disprove this research hypothesis, it is vital for the sake of the current
examination is to identify what features of PFI process could offer tax payers with VFM; these for
instance,asfollows:
3.7.2 Risk Transfer
It is often argued that by researchers PFI projects can result in better value for money through proper
riskallocation.
According to Allen (2001), in majority of PFI deals, the private sector is responsible forfinancing, building,
designing and operating the facility based on the public sector client’s ‘’output specifications’’.
Therefore, under this scheme projects have to achieve a substantial risk allocation to the private sector
that is best able to appraise it and manage it. Under this contractual arrangement, the public sector
must pay the contractor a unitary chargers/ or revenue payments for using the facility over an agreed
contract duration and the asset’s ownership will either remain with the private sector or it will be
returnedtothe publicsector.
In favour to the aforementioned argument, Li (2004) argued that, PFI in UK is a form of public–private
partnerships (PPP) that always seeks to combine the advantages of risk allocation to the private sector,
competitive bid and flexible negotiation. However, it is substantial that both the private bidders and
publicclienthave toappraise effectivelythe potential risksondailybasis.
It has been persuaded by Brigham (1985), the degree of return on an investment is proportional to the
amount of risk borne. According to Merena and Smith (1999), PFI risk should be allocated to the parties
bestable to appraise andthenmanage itin orderto accomplishanoptimumcost.
Furthermore, Ball and King (2006) claim that not all risks associated with projects have to be transferred.
For instance, the risk associated with energy prices is might not wise to be transferred. Therefore, if the
PFI’s contractor fails to control projects’ risks then it would be more likely that an extra premium will be
added.
The issues of risk sharing and allocation between both the client and the contractor should be identified
and negotiated.
Moreover, it has been convinced by Ball and King (2006) the risk transfer has a substantial profit to the
public sector as it relieves its cost liability of the risks transferred. However, it is vital to ensure that the
rightrisksbeenallocatedtogainan overall value.

37. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
Comptroller and Auditor general (2003) illustrate that the public sector comparator (PSC) is widely used
to compare PFIvalue formoneyand itscost benefitsof risktransfer.
In response to the aforementioned aspect, a survey has shown that in 17 PFI schemes, the savings
against the PSC were less than the risks allocated cost to the public authority. However, this clearly
revealsthatPFIcouldprovide value formoneyinfavourtoriskallocation.
3.7.3 Focus on Outputs rather than Input
Pitt et al (2006) explained that, PFI is an important difference to its traditional procurement counterpart
as the client instead of make specifications based on what they require to conduct their business, is
rather made it based on their O/P for their business in response to what is required. For instance, a
hospital stipulatinghowmanybedsisneeded.
3.7.4 Competition
In regard to PFI tender process many SPVs will be bidding competitively for a traditional form of
contract’s works. In order to gain better VFM, PFI has to be won in an open tender as it will lower the
price. Pitt et al (2006) however, argued that the bidding costs needed to be balanced against the
negotiations benefits as these will likely be compensated elsewhere. The powerful force to VFMand the
negative competition may lead to ignoring the Public Sector Comparator (PSC) and the fact that PFI
procurementmightnotappropriate.
3.7.5 Contract duration and Scope
Due to including FM as important contracts as well as the lengthy PFI ones as been asserted above is
made to appraise andconsiderseriouslythe whole lifecosts.
McDonald (2001) explained that, unless full attention is given to FMand design and construction during
the procurement phase then better VFM could not accomplished in order to minimize the whole life
cycle costing. According to Pitt et al (2006), argued that in PFI process the consortium needs to ease
payments before payments are received, therefore, they need to construct the asset before receiving
so and they are often invest heavily in the contract initial stages for the sake of completing works quickly.
Therefore, a concession contract period will enable the contractor to recover this initial cost when time
wentby.
As a result, if this is the case then PFI would not be able to guarantee VFMagainst PSC in the absence of
‘’concession’’ contract period. Therefore, from the tax payers point of view, the PFI ultimate benefit is
that the total cost to them are responsibilities which are spread efficiently over the concession duration
debt.
3.7.6 Bid Costs
Pitt et al (2006) explained that PFI bidding costs are approximately 3% of the project total cost,
therefore, this could be a huge restrictive to potential bidders. Lenihan (2002) therefore, claims that this

38. Universityof Manchester|School of Mechanical,Aerospace andCivil Engineering
could result in negative impact on VFM as it damages the bidding process through terrifying away
competition.
3.7.7 Borrowing Costs
Collins and Walls (2006) cited that governments could borrow money more cheaply than the private
sector at a lower rate of interest; though, if this is the case then PFI does not provide VFM. Accordingly,
if the capital costs is to be considered this should be made through the difference between PFI and the
traditional approachof asset’procuringcost.
3.7.8 Private Sector Management
Pitt et al (2006) claims that there is a genuine difference exist between the private and public sector
procedures and systems which is often opinioned as measures attract VFM. This fact lies behind that the
private sector’s delegation of authority and level of responsibility are much more which help things to
proceedquickerwithlesspoliticsinterfering.
3.7.9 Performance measurementandincentives
Pitt et al (2006) persuaded that incentives and performance measurement might increase the client
confidence if they are allocated efficiently; however, it will not directly affect VFM. In response to this
event, incentivising and promoting the private contractors this would certainly motivate and inspire
them to achieve the overall project objectives; therefore, eventually the notion lie behind VFM and
profitmaximizingbehaviourwouldbe emphasised.
3.7.10 Contract Flexibility
Big amount of money have been secured by refinancing, due to the fact that, over the last 10 years the
trend regarding interest rates has been lowered, therefore, PFI scheme financing costs have been fallen
down accordingly. Though, in order to safeguard more VFMthen itis vital within the contract terms and
conditionsflexibilityshouldtake place.

39. 3.8 Theme three:Advantages and Disadvantages to PFI
3.8.1 Advantages to PFI with UK Construction
In regard to the advantages associated with PFI, Kee and Farrer (2008) argue that PFI has
provided an enhanced sort of government contracting in a right set of situations which
couldpotentiallyresultinbettervalue formoney andeffectsavings.
Thisaforementionedargumenthasbeenjustifiedbythe followingaspects:
 Lengthy contracts enable the private investment to be repaid over a long period of
time which results in lower costs to the government with respect to the public
servicesatthe earlystage of the process.
 Utilizing an output passed specification means that PFI is reply on a specific service
level ratherthanI/Psbeingutilizedtoprovidethisservice.
 Bidding completion over a contract lowers the capital services’ cost over the long-
term.
 Management skills of private sector are used to enhance the operating efficiency
whichinclude the service deliveryandeconomicsscale.
 Managements are based on incentives and performances are needed to hold PFI
provider accountable for results which could be used to create financial incentives
for the sake of superiorperformance.
 Akintoye et al (2003) argues that through risk allocation, the public sector is
secured against time, cost and quality aspects that could effect on project’s success.
Therefore, under the current guidelines in the UK, the public client will provide
precise information about risk transfer to be confirmed during the project’s
procurement process (NAO, 1999). Furthermore, he claims that with respect to risk
and reward aspects associated with risk transfer, the private sector should be
enthusiastic about securing chances due to the profit from risk allocation that will
occur.
 It has been cited by Controller and auditor general (2003), PFI incentivizes
consortiums an accurate estimates which represent maintenance and construction
total cost of building assets when pricing a contract to safeguard the risk of
claiming unforeseen increases might raise later. Thusit clearly shows that contracts
within PFI deals ones agreed are very binding in terms of spiralling variation costs.
As a result of the aforementioned argument, Contractors are extremely motivated
to deliver the construction phase on time because both parties have agreed earlier
on payment issues to be released after the assets being ready for use as well as
servicesdelivery.
 It has also been persuaded by (Hambros 1999) in favour of the full responsibility of
consortiums for the design, construction, operation and maintenance (O&M), by
placing sort of guarantees to improve build ability and maintainability, therefore,
the design convenience and suitability for the future construction and operation
practiceswouldbe met.
Disregard the unforeseen increases in project’s capital costs or the increase in the
maintenance costs or the expected ongoing service delivery; it is often convinced that in
response to the public view the responsibility of the traditional public sector provision
against the public services delivery in the construction industry has been unlimited reward
inaction isexpectedthatmoneywillbe available.
Therefore, as explained by Tiong and Anderson (2003), due to the fact that the capital
expenditure decisions must enter sort of rigorous analysis and tests PFI rectifies this image.
Additionally, through gaining cost certainty for the tax payer and negotiating the
consortium;the publicsectorcouldcoveritsongoingmaintenance costs.

40. Since PFI will no longer responsible for the daily service delivery, the public sector should
manage to significantly reduce its administration costs in PFI process (Bennett,1998).
Therefore, on the other hand, the public client will simply receive a periodic reports as well
as controllingthe private sectorperformance.
Jones et al (1996) claims that from the government point of view the amount of public
money associated with the capital investment through PFI process initiation will be reduced
as it releasedthe publicsectorof anyamountof publicdebt.
The Public sector is efficiently able to hide costs for their public purse through undertaking
PFI scheme in the UK construction industry .As a result; on the one hand, due to the fact
that the private sector has undertaken the loans thus the public obligations involved in PFI
process do not appear as public sector borrowingin the annual balance sheet. On the other
hand; as persuaded by Akintoye et al (2001), the public sector has to be concerned about
the rate of interest against his fund raised which it will count toward measures of
governmentshortfall aswell asitsborrowing.
Utt (1999) argued that, PFI procurement is able to offer both the private and public sectors
approaches on how to choose innovative techniques in providing services and assets. As a
result, this would certainly result in time savings by avoiding delays in the project delivery
and/or speedingupdevelopingthe project.
National Audit Office (2001) claims that due to the fact PFI provides substantial benefits to
the local economic development in locations where the services facility are delivered or
builtdeemedtobe attractive.
3.8.2 The disadvantages to PFI withinUK construction
PFI clearly reveals that a number of contributions to the improvement to infrastructure
projects and public services. However, PFI as compared to its others procurement
counterparts has not totally achieved success. According to Akintoye et al (2001), there are
several problemsassociatedwithPFIprocurementsuchasfollows:
 Special Project Vehicle (SPV’s) information could be difficult as different members
have differentobjectives.
 The government’sattitudemightcontributepositivelyor negativelyonapplyingPFI
procurement.
 Settlementsare made basedonComplex negotiations.
 Contractors might be suspicious about overruns due to innovation inputs in both
designandconstructionphasescouldbe inhibited.
 Finance’s cost is extremely high; however, governments could lend money more
cheaplythanthe private sector.
 The discrepancies between the public and private sector in terms of different
decisionmaking,differentmodelsof operations,andaccountability.
3.8.2.1 High Costs associatedwith the biddingprocess

41. It has been persuaded by Ball et al (2007) that there is a considerably high cost associated
to PFI bidding process rather than a project procured under a traditional procurement
route for boththe publicservice clientandPFIbidder.
Similarly, Birnie (1999) has discovered that the tendering cost to PFI deals with the UK
construction industry is higher than any other procurement financial mechanisms. In
response to this event, (HM Treasury Task Force 1998) Claims that PFI’s tendering process
is much is highly complex due to the 14 stages of PFI procurement process and its
negotiationandbidding elementsassociated withit.
Consequently, the PFI provider is required to provide both the design and cost that can
meet the ‘’output specifications’’ and providing operational and maintenance (O&M) as
well as other facilities over the concession period. In contrast, the public sector client will
face significant challenges with the evaluation process. According to Ezulike et al (1997)
other costs to the bidding process include the cost of investing equity and the cost of
assemblingaconsortiuminrespecttobusinessentitythatwill needtobe created.
3.8.2.2 Lack of experience inbothPublicand Private sectors relatingto PFI
It is argued by Morledge and Owen (1998) there is a necessity for better training of the
public officials involved in PFI deals and general shortage of understating PFI’s concept.
Akintoye et al (2003) also claims that there is lack of appropriate skills and experience
within the private sector and that operating, maintenance, financing and investment in
long-termassetsare notthingsthatthe constructioncontractorsare familiarwith.
Therefore, a shortage of critical experience in line with high participation costs meant that
PFI schemes participation to date have beenlimited to a reasonably few numbers of private
sector firms being involved. In response to this event, Akintoye et al (2003) claims that due
to the nature and sufficient private sector market have not yet been established, the nature
of PFI within its emphasis on large scale long-term projects, complex, and substantial
amountsof risk transfer.
3.8.2.3 Conflictsbetweenpublicandprivate sectors withinPFI
Naturally, PFI has been set up in order to ensure that real benefits between the private and
public sectors are realized/ or shared and to compliment additional public sector
investment. However, Akintoye et al (2003) illustrated that dispute is more likely to be
happened within PFI process in terms of assessment criteria to both public participants and
the private contractor. As a result, the contractual relationship between both the private
and publicsectorhave tobe solidtoavoidanysort of conflictmightarise later.
3.8.2.4 Costs ofPFI compared to traditional publicprocurement
It is often argued that by Brinie (1999) the cost of PFI deal in some cases will be normally
higher than others traditional procurement routes because of the high cost associated with
the private sector shared to such profit due to such premiums and uncontrollable risks. In
response to this event, Akintoye et al (2003) claims that due to the fact that the private
sector could not lend money for capital investment more cheaply than the public sector;
therefore,aPFIcost ishigherthanconventional procurement.

42. 3.8.2.5 Politicsand Delays
It has been convinced by Akintoye et al (2003), due to the fact that PFI nature requires
detailed examinations carried out by the government (political party) to ensure value for
money; therefore, PFI process within the UK is often delayed. Furthermore, Ezulike et al
(1997) argued that there are number of rationales lie behind the complexity of PFI
procurement process such as lengthy negotiation time between the private sector
consortia over the contract’s terms and conditions, its project advisors and the public
sector client as well as the extensive amount of time used within the transactions of
contract; for instance,PFIprojects’bidding.
3.8.2.6 Design
Mortledge et al (2006) claims that the design issues to PFI schemes were often a sign of
disapproval whereby the PFI solution to a problem would usually be the most economical
design method. Therefore, this was constructed as a technique for risk mitigation within the
notionliesbehindthatinnovationwasseentobe risky.
3.8.2.7 Value for money
Mortledge et al (2006) argued that there has been a controversy debate against the
hypothesis to PFI whether or not it provides value for Money. In response to this event,
National Audit Office (2001) persuaded that the authorities are accountable for managing
121 PFI deals value worth £5.73 billion which represents 81% of these ranked value for
money. Furthermore, Anderson (2000) studied that an average saving of 17% has been
shown in a sample of 29 projects. Allan (2001) argued that there are 7 out of 15 PFI
projects have been appraised in value for money terms which this reveals that all PFI deals
inthe UK have shownsavingsfrom£4.4 to £22 billionsince December2001.
According to Allen (2001) claims that there is a substantiation that PFI process is quite
suitable for infrastructure projects, for instance, prisons and roads, while hospitals and
schoolshave smallergain.
Audit Scotland (2002) examines in response to the private sector financing costs within the
Scottish school sector, the private finance’s average rates of return was approximately 8 to
10% peryear whichitrepresents2.5- 4% higherthanthe publicauthoritywouldpay.
Cuthbert and Cuthbert (2008) had conducted a survey based on two (2) completed
hospitals in Scotland which found that in response to Edinburgh Royal Infirmary the cash
value rate of returns on private finance were £766 million. Then this figure was discounted
to 5% as a rate of interest been paid by the hospital on public finance to give £416 million
that is more than twice the capital cost (£171 million) been raised by the private sector for
buildingthe hospital.
3.8.2.8 InflexibilitywithinPFIcontracts

43. Due to the fact that once a contractor and government are locked into PFI schemes when a
financial closure is reached, then anyfurther changes will be expensive to apply. As a result,
PFI contracts are very fixed and stiff, thus it is substantial that at the beginning the client
shouldaccountfor all aspectstheywill need.
3.9 Controversydebate
There is a big controversy debating that using private finance to fund projects will provide
Value For Money (VFM) to the public sector whereby the public sector can raise it more
cheaply than its private sector counterpart. However, VFM could be achieved through
balancing the additional cost of private funding through increased efficiency by applying the
industry best practice approaches such as 'Lean Construction' and the potential for private
sector design innovation and creativity, construction and maintenance of the project assets
(CIC, 1998; Birnie,1999), and transferring risk to the private sector who best able to manage
it (PPPForum,2005c).
In response to these events, however, researchers have argued in favour as well as against
the viabilityof usingPFIprocurementmechanismforfinancingconstructionprojects.
According to Henjewele et al (2011) Value for money(VFM) is a basic reasonfor PFI deals as
well as risk transfer. There has been opposing evidence in PFI performance appraisal
concerning this issue. His study persuaded the uncertainty and complexity of PFI projects in
termsof VFM.
Indeed, VFM appraisal requires rigorous and daily review of the project lifecycle activities.
However, the finding concluded that: Firstly, VFM appraisal is a continues exercise due to
schedules, budgets and requirements change as projects needs changes. Secondly, VFM
optimism has been emphasized by the author. However, the tendency lies behind higher
gains at lower cost is valid. At the early project definition where business case is identified,
more requirementswere identifiedwithoutincrease the costaccordingly.
Finally, the substantiation of the discrepancy between pre-contract and post contract VFM
appraisal has been verified. In response to the aforementioned argument, Li (2004)
opposes this saying that: governments believe that PPP/ or PFI procurement can provide a
wide range of benefits to the public sector, which include: innovation in delivering public
services, enhanced government capacity, time management of project implementation and
cost reduction, and risk transfer to the private sector in order to gain value for money to
taxpayers. However, there are number of critical success elements of PPP/PFI deals in the
UK Construction industry have been persuaded in the literature such as Government
guarantee, Project implementability, Available Financial market, Effective procurement and
Favourable economicconditions.
According to Treasury and National Audit office reports that PFI deals are more likely to be
delivered on time and to budget. In 2003, study has showed that, the only project went
beyond its estimated budget was where the public sector was not committed to the agreed
businesscase (HMTreasury,2003).
However, according to Akintoye et al (2003) factors challenges the achievement of best
value are: high cost of the PFI procurement process, pricing of facility management services,
lengthy and complex negotiations, difficulty in quality of service specifications, the failure
of public sector clients for managing consultants, and possible conflict of interest among
partiesinvolvedinthe procurement.

45. CHAPTER 4
DISCUSSION
CHAPTER 4
DISCUSSION
4.1 Introduction
This chapter articulates the literature review findings and how it enforces the research aim
and objectives. It further reveals and scrutinizes the research findings obtained from the
literature review.
4.2 Discussion
Having conducted the secondary research in this dissertation and the author will now try to
whetherprove ordisprove the aforementionedhypothesisinthe rationale sectionthatis:
‘’The PFIdoesofferVFMto publicsectorwithinthe UKconstructionindustry’’.
By completing the literature review, it was found that VFMin the UK construction industry
wouldbe affectedbysome factorsas follows:
 Politics
 Borrowingcosts
 Tender/ BidCosts
 Whole Life Costing
 Riskallocationfromthe publicsectortothe private one
 Focuson ‘’Outputspecifications’’
 IncentivizingPerformance Measurement
 Contract Scope and Duration
 PFIdeliveringprojectsconnectingtomoneyandtime.
 PFIprojectscosts as comparedtotraditional ones.
 PFIcontracts’ Inflexibility.
 The qualityof the total final buildsqualityandDesignissues.
 CompetitioninPFItenderprocess.
 FacilitiesManagement(FM)
 Noveltyinapproachesforthe provisionof servicesandassets.
 PartneringandExperience betweenprivate andpublicsectorsinPFI.
 Managementof Private Sector.
 Contract Flexibility
The purpose of this study is to investigate, explain and analyze the usefulness of the PFI in
the UK construction Industry. Therefore, this study has focused on both the theoretical and
practical applicationinordertoanswerthe studyquestions:

46. Do you think that PFI approaches are objectivelyexaminedbythe publicsector
against VFM?
Do you think that PFI providesVFMto the publicsector?
a- Cost of Projects
As explained earlier in the literature review chapter, Pit et al (2006) argued that PFI costs
are higher than its traditional procurement counterpart as the public sector will be able to
borrow money cheaply as the private one would. Furthermore, the higher bidding costs
experienced by the private sector by the project tendering, resulting in the overall cost of
PFIbeingmore expensive thanthe traditional contracts.
Therefore, as also being explained in the literature review by Ball et al (2007) there are
always higher bidding costs associated with PFI due to the fact that the private consortiums
are needed much time and resources to develop the mechanisms and the design in the PFI
process.Asa result,these costswill be recovereduponthe contractaward.
Ball and King (2006) claims that there are major economic benefits to the public sector by
decreasing the liability and risks and then provision of cost certainty. Additionally, as
investigatedbefore competitionbetweencompetitorsconsortiumswill drivecostsdown.
Furthermore, Davies (2004) argued that in terms of overall costs the scrutiny of whole life
cycle costing and the inclusion in the PFI process is for every single unit spent on capital
costs that five unitsare spentonmaintenance.
b- Risk Transfer
The justification lies behind the fact that risk allocation to the private sector was
tremendously positive form the view point of the public sector. This is illustrated by
Akintinoye et al (2003) that through proper risk allocation the public sector is effectively
safeguarded against time, cost and quality matters that can affect success. Therefore,
construction can be substantially risky though by transferring risk to the private sector, cost
certaintyisgiventothe tax payeras mentionedbefore.
c- Quality of the final build
According to Hambros (1999), the justification lie behind the involvement of the private
sector in the public sector works is that the set up and nature of PFI is substantially worthy
to be motivated and stimulated to produce high quality and standards of buildings. As a
result, the private sector will be accountable for whole life cycle costing of the project
during the mconcession period as well as will be qualified for payment upon completion.
Therefore, if the building was not delivered to the right standard of quality, it is likely that
the consortiawill thenlostprofitthroughtheirFM.
d- Managementof the Project
The efficiency of the private sector management skills in PFI projects is the main rationale
lie behind increasing the operating efficiency comprising the delivery of services and
economicsof scale as the authoritylacksespeciallyinITprojects.

47. In response to these events, it is persuaded by Bennett (1998) that through the
engagement of the private sector management it is claimed that the public sector should
effectively be able to eliminate the administration costs due to the fact that there is no
longerneedtorun the projectdayto day.
e- Delivery(time and budget)
It is often argued that time and budget constraints are paramount, as a result measurement
under PFI will be made on high efficiency as laid out in the literature review. However,
most of PFI projects have been delivered on time and on budget. The rationale lie behind
this is that the effective risk allocation to the private sector under this scheme as
mentionedbefore whichofferingtime andcostcertainty.
f- Design
Swaffield and McDonald(2008) claimed thatin order to safeguardefficient life cycle costing
with PFI so that an efficient design has to be associated in the PFI process from the
beginning. In response to this event, Hambros (1999) argued that in order to assure long-
term profit or VFM high level of design and standards has to be delivered by PFI
consortiumsduringthe concessionperiod.
Referring back to what has been mentioned in the literature review is that the lengthy
design process in PFI projects made many consortiums to be involved in the project.
Therefore, base on this fact it is legitimate that to emphasize the notion lie behind the
design process would be superior within PFI projects as compared with the traditional
procurementasthiswill have onlydesignteamprovidingI/P.
g- Innovation
Referring back to the literature review, it is often argued that PFI in its self is substantially
innovative type of procurementapproach.
h- FacilitiesManagement
Due to the fact that facility management is vital issue within PFI process as the private
sector will be accountable for life cycle costing as well as FM. Therefore, it is substantially
importantto deal withthoroughly.
As stressed out in the literature review El – Haram and Agodiou (2002) explained ways in
which FM should be involved in PFI projects as The author believes that their I/P will be
vital in guaranteeing overall VFMin the process for tax payers. Therefore, by proper FMthe
overall costs of projects will be lowered. In response in these events, due to the fact that
Facilities managers are hired in an early stages in the project and in large numbers during
the tenderanddesignphasesinorderto reduce the managementcosts.
In regard to the second question; However, Due to the fact that the notion lie behind
effective value for money to the tax payer is justified from the outset of PFI process in any
project as explained by (Pitt et al, 2006). In response to this event, 14 stages process has
beenclearlydefinedandidentifiedforthe sake of revealingvalue formoneyjustification.

48. Therefore, according to Kee and Forrer (2008) the validation of this process commences at
stage 3 with the reference project and the business case and again at stage 9 and 12 when
the PFI proposal is examined for affordability and value for money (VFM). At stage 12 the
PSC is introduced to evaluate the cost of the chosen bidders for the sake of VFM. On the
other hand; however, Pitt et al (2006) claims that VFMappraisal is not a precise or accurate
science as itwill differ from stakeholder to another. Therefore, the view point of VFMmight
differfromthe publicsectortothe private one.
4.3 Summary
Due to the rationales being highlighted in the in-depth critical appraisal of the literature
review as well as the discussion being convinced and laid out within this section, so that the
author of this study would like to stress out that: by the lengthy PFI tendering phase within
the inclusion of whole life cycle costing and Facilities Management (FM) on the design
agenda from the beginning that long-term costing of a project should be reduced. This
would be at the cost of a risk to the private sector and costly tendering process. This could
be sorted out by efficient reduction in whole life cycle costing that the asset will be
importantlymore financial.
Therefore, through detailing the tendering process as previously claimed elements of
design, facilities management and quality should be enhanced when compared with a
traditional route of procurement.
Though, the substantial catalyst in the author perception to the argument that ‘’PFI offers
VFM’’ to the tax payers as mentioned before lies into the importance of risk allocation to
the private sector.
In response to these events, the PFI public sector is given cost and time certainty in an
industry that is fraught with examples of big errors in the construction industry; for
instance, Wembley Stadium. Therefore, Due to the fact that although the initial costing in
PFI process might be greater due to the lengthy tendering process, the author feels that the
otherbenefitsensuresoverall VFMwill be accomplishedinthe majority.

49. CHAPTER 5
CONCLUSION AND RECOMMENDATION
CHAPTER 5
CONCLUSION AND RECOMMENDATIONS
5.1 Conclusion
Since the PFI beginning/ or initiation in the 1992 in the UK construction industry as well as
politics, its process has significantly adapted and evolved over time. The rationale lie behind
this is that, the need to move forwards with the economics climates and cycles which could
happen in the modern financial sphere and the necessity to provide tax payers with huge
gainsof VFM.
From the current examination what constitutes VFM in the PFI process has been
investigated and whatis obvious is that these issues are deeply interrelated as well as multi
layered. Though, the author of this study believe that at the heart of VFM for the public
sector client are the notions lie behind the generation of both cost and time certainty and
risk allocation which is otherwise strongly opposed in open and risky industry where the
riskof failure couldbe catastrophictothe publicreputationsandbudgets.
In the current study the author has explored the advantages and disadvantages of the PFI;
therefore, It could be noted that PFI as a process was not without fault. However,
eventually the author confirms that the PFI is justified by the belief that it ultimately offers
VFMto the UK tax payersas well asby itscatalyticwayof initiatingpublicsectorprojects.
5.2 Study limitations
Having conducted the current examination the author would stress out some limitations
have been realized and therefore for the sake of further work, these limitations and
constraintsshouldbe addressedmore preciselyasfollows:
 PFI’s case studies which reveal Value for Money (VFM) evaluation were certainly
often covered through highly confidential agreements with companies’ procuring
Authority. Therefore, going through in-depth critical analysis of them is highly
challenginganddifficultormightseemtobe as a constraintto the currentstudy.
 Limitations in the number of people who willing to do primary research interviews
due to bothauthor’sfew networkingandtime constraints.
 Limitations in the current updated academic secondary research; for instance, 2011
and 2012.
5.3 Recommendations
5.3.1 Possible improvementstoPFI Process
By answering the last objective mentioned in the rationale section which is to examine
possible solutions that could be made to the PFI with the UK construction industry, the

50. author would make some recommendations which have been made relied on the findings
fromthe secondaryresearchasfollows:
1- The matters of services replication need to be addressed by the public sector. This
is when considering an involvement of consortium or group of potential ones in the
tender process which the services and resources they have should be ‘’contracted-
out’’for the sake preventingwastedresources.
2- The private and public sectors need to address the matters of unified and effective
partnering to ensure that value is not lost by conflicting objectives and therefore
needtocooperate effectively.
3- The private and public sectors need to investigate the lengthy and extensive
tendering process as well as developing ways of lowering this risk from the private
sector point of view. Therefore, the author believes that in the stable and unstable
economic periods number of private sectors firms tends not to use PFI due to the
highinitial riskprofile.
4- Due to the fact that unitary charges have to be minimized, therefore, the public
sector needs to emphasize that competition is deep-rooted in the process as the
consequencesof thiswouldbe catastrophictovalue forthe publicsector.
5- The innovation issue has to be clearly addressed as could be seen from the present
findings this is lacking in the process because of adding partially risk to it and
therefore,itharmsthe tax payers.

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55. Appendixes
Appendix a:DifferencesbetweenPFIandtraditional procurement
Area of consideration Characteristics oftraditional
publicsector procurement
Characteristics of
traditional private sector
procurement
Durationof private sector
involvementinthe project
Until constructionof the
facilityiscomplete (plusthe
defectsliabilityperiod)
Normallyforat least25
yearsfor construction-
relatedPFIprojects
Specificcompany
involvement
Appointedbythe public
sectorclientonan individual
basisfor the supplyof
specificskills
Involvedasa part of a
concessionaire consortium
withall the skillsnecessary
or takinga keysupply
contractingrole,being
appointedbythe bidding
firmor concessionaire
Private sectorrisks Specifictothe area of
involvementandlimitedto
defectliabilities
Wide rangingand longterm
Remuneration Lump sumor percentage fee Annualizedpayment
Opportunityforprivate
sectorto suggest
improvements
Limited Considerable
Keyfinancial consideration
for private sectorcompany
Maintainingapositive cash
flow andmargins
Havingan adequate asset
base and debtfacility
Attitude requiredof the
private sectorfromthe
publicsector
Maintainingapositive cash
flow andmargins
Maintainingapositive cash
flow andmargins
Responsibilityfordesign,
build,finance andoperate
Lieswiththe publicsector
procurer
Lieswiththe private sector
concessionaire
Accountabilityforthe
resultingservices
Publicsectorprocureris
accountable to
itself/Parliament
The private sector
concessionaire is
accountable tothe public
sectorprocurer whointurn
remainsaccountable to
parliamentforthe services
provided.
Table 1: Differences between PFI and traditional procurement
Source:Ahadzi andBowles,2001

56. Appendix b:RiskstypesinPFIprojects