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Do unreliable traffic forecasts blight PFI viability?

The game is up for PFI — the public seems reconciled to the idea that it has worked primarily as a handy accounting tool to keep costly major projects off the government’s balance sheet. But are the secondary benefits enough to protect its reputation as the best — or only — procurement method in times of economic crisis?

The ability of PFIs or PPPs to deliver bargain schemes for the public has been the subject of increasing scrutiny as many schemes mature. The transfer of risk to the private sector and trust that it is better at managing delivery of large schemes than the public sector have been seen as worth the high price tag for such projects.

Construction of major infrastructure is a risky business and negotiating the distribution of risk is a core part of brokering a PFI deal. While the client may retain responsibility for the risks that may see the costs skyrocket — such as low probability, high consequence events — the PFI partner will take a punt on its expertise to manage risks such as poor demand for — or availability of — the asset, or of overspend or programme slippages during construction.

Expertise from consultants and major contractors bolsters their confidence in being able to accurately gauge future demand for the assets and their ability to manage a cost effective project, which is what ultimately gives them the financial motive to take on such a scheme.

But there seems to be a growing backlash against this very idea and concern that too little risk is being transferred — leading some to question the value for money to the taxpayer.

Conservative MP and Commons Treasury select committee member Jesse Norman is one politician who firmly believes that the balance between a bargain for the public purse and a profit for the private partner has not yet been found. And last week his campaign for a PFI rebate from concession holders received a boost as Treasury economic secretary Justine Greening said that she and chancellor George Osborne “thoroughly support” the principle of making savings on PFI contracts
and pledged to look at how best to do that in the coming weeks and months.

And that assurance can’t come soon enough as last week saw high profile PFI road projects in the spotlight for the wrong reasons. In Ireland, Sinn Féin councillor Maurice Quinlivan slammed the “shambolic” PPP arrangement that delivered the €590M (£525M) Limerick Tunnel under the Shannon River. Under the arrangement the Direct Route consortium — comprising Allied Irish Banks, John Sisk & Son, Lagan, Meridiam Infrastructure Finance, Roadbridge and Strabag — negotiated a savvy deal with the National Roads Authority (NRA) that saw the client retain responsibility for toll revenue shortfalls.

Penalties paid by the NRA to Direct Route amassed to £1.1M over a four month period late last year — at a rate of over £8,900 a day — thanks to traffic running through the tunnel failing to reach predicted levels.

“Sinn Féin constantly warned that the tunnel would be a missed opportunity as it would unfortunately not reach its full potential because it is being tolled and built so close to the city centre,” says Quinlivan.

“Worryingly there is no sign in the immediate future that the tunnel will achieve the 17,000 vehicles a day needed to pass through the tunnel to avoid these penalties. My understanding is that less than 13,000 vehicles a day are using the tunnel. The taxpayer therefore stands to lose millions over the duration of the contract.”

Forecasting has been beset with problems, including on high profile projects such as the Channel Tunnel Rail Link (NCE 2 March). More recently, Brisbane’s Clem7 project in Australia also failed amid an acrimonious dispute about traffic forecasts.

The tolled tunnel opened in mid-March 2010, and recent traffic flow through the tunnel has averaged 24,000 vehicles per day, compared to a forecast average of more than 90,000 per day. Tunnel operator and owner RiverCity Motorway Group went into administration on 25 February as a direct result of the tunnel’s poor performance.

Back in the UK, problems are also surfacing. In February, the Commons Public Accounts Committee labelled the £6.2bn M25 PFI “flawed and biased” and slammed it for its resulting £1bn additional cost to the taxpayer (NCE 10 February).

With 61 PFI projects in the pipeline with a capital value of £7bn — and money tight — the public will no doubt want assurances that they will deliver value for money.

But if the previously distinctive benefits of risk transfer become less convincing, surely the question remains — is PFI worth it where projects rely so heavily on the vagaries of traffic forecasting?

Readers' comments (3)

  • John Mather

    PFI payments may be related to availability and/or quality of service thereby avoiding the risks associated with traffic forecasting. It is difficult to forecast traffic flows over a 30 year operating period, particularly when there is little or no control over the price of fuel and/or the availability of alternative routes. PFI offers a means of obtaining infrastructure and services which would otherwise be unaffordable. It enables risk sharing, the management of whole life costs and a partnership approach. We need better deals and affordable finance, not a knee jerk reaction to abandone PFI as a procurement option.

    John Mather

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  • What, if any, sliding scale formulae were used on these road schemes to limit any under-use additional payments to the net losses experienced by the Contractor. Such formulae can easily be developed from sensitivity analyses carried out on the financial model provided and approved between BFO and Financial Closure dates.

    The main problem with PFI schemes is the excessive add-on costs from banks, insurers, bondsmen,accountants, lawyers and other non-engineering professionals. PFI's were sold originally not so much because Clients didn't have the money or access to it but that the Concessionaire Company could get cheaper finance. I don't think the extent of these additional add-on costs were not originally fully appreciated. .

    I suspect a better solution - given funding availabilty, would be a standard D&B Lump Sum Contract scheme with minimal prescriptive specifications encouraging innovative and more efficient designs and construction techniques, which includes: a 2-5 year full cost Defects Period/O&M Period, formulae to demonstrate full life cycle total costs, and follow-on competitively tendered period O&M Contracts.

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  • Please could abbreviations be defined when they are first reported. PPI and PPP should be defined in the first paragraph, perhaps with an indication that they refer to outsourcing.

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