The chief financial officer for Transport for London (TfL) has justified the use of the now abolished-private finance initiative (PFI) on the upcoming Silvertown Tunnel project in east London.
Speaking at a London Assembly budget monitoring sub-committee meeting TfL chief financial officer Simon Kilonback said that under some circumstances PFI deals could still be successful.
PFI and PF2 deals were abolished by chancellor Philip Hammond in the autumn budget last year as a result of their perceived poor value for money.
But as an exception to this, projects which were being procured by devolved administrations were specifically allowed to use them, if the contract was deemed to be value for money.
“I was phoned on the day of the announcement by the Treasury to say that means this type of project [Silvertown Tunnel],” said Kilonback.
Defending the procurement mechanism, Kilonback said PFIs and PF2s were not an inherently bad form of procurement, if they were applied to the right type of project and used the Docklands Light Railway in London as an example of a successful project.
“The DLR is a great example of a piece of infrastructure that was delivered through PFI and has been a significant success,” he said.
“One of the reasons why it was so successful was it was new discrete infrastructure with no interplay with the existing network. You could let the private sector deliver and run it and repay the debt and then give it back to the public sector at the end of that period of time.”
Where he said PFIs had been less successful was when the “inherent rigidity” of applying the finance over 30 to 40 years had a direct operational impact on the transport services.
He said when this occurred, and it was necessary to bring the contracts under public control, it was “very very difficult” for the public sector to manage the contracts.
However, Kilonback said in the case of Silvertown Tunnel, the debt could be repaid using a toll structure and described the project as “relatively simple” therefore lending itself to the PFI model.
“The fact that the design consent order requires a toll to be levied to manage the congestion in the area, and be a demand management tool in the area creates a revenue stream,” he said. “We’re not asking the private sector to take the revenue risk, TfL is retaining that. [Instead] we’re asking them to take the risk on building and delivering the project – there’s no need for any scope change so it’s a relatively simple project.”
He added that although TfL was experienced in building and commissioning railways, it had not built any road tunnels in 50 to 100 years leaving the, more experienced, private sector better placed to build and run the project.
TfL announced that joint venture – named RiverLinx – comprising Bam Nuttall, Ferrovial Agroman and SK Engineering & Construction was named as the preferred bidder on the £1bn project last month.
Kilonback said the interest and subsequent winning bidder was highly experienced in road tunnel construction and the cost of the contract reflected this.
“The overall cost of finance imbedded in the PFI reflects that [the experience of the contractors], and given the requirement to do this, but the constraints on TFL’s balance sheet, this is one of the few occasions where this type of financing mechanism makes sense.”
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