Pros and cons of PFI

It's official – the Private Finance Initiative (PFI) is now firmly established as the route of public sector funding which is supported by both the major political parties.

And, as local authority lawyers in private practice acknowledge, for an initiative formally created in November 1992, it has become established as an area of practice in its own right in a relatively short period.

As can be seen by the table (right) compiled by PFI Report last month, PFI has already resulted in a welter of work for firms across the board.

With PFI being seen as more than just the 'flavour of the month', the Public Private Partnerships Programme (4Ps) was set up by the three local government associations in April 1996 and is funded 'by local government for local government', to promote what are essentially joint ventures of the private and public sectors.

And 4Ps has also announced a number of pathfinder projects which are designed to help 'trailblaze' projects as diverse as the Nottingham Light Rapid Transport System and a major road scheme in Essex.

But it is not all positive – as many observers point out, the recent cases of Credit Suisse v Allerdale Borough Council and Credit Suisse v Waltham Forest London Borough Council have “thrown doubt on the powers of local authorities to do anything”, because they suggest that the purposes for which a local authority makes a decision may affect whether it is lawful.

And it is unlikely that third parties and, in particular, commercial organisations from the private sector want to be involved in having to consider legal niceties such as whether an authority's actions are within its powers with its involvement in major PFI projects.

And these are not the only complications. As 4Ps executive Rob Hann, a senior solicitor on secondment for a year from Eversheds Leeds' office, says, one of 4Ps' most pressing tasks at the moment is to “make sense of the consolidating capital finance regulations which came into force on 31 October 1996; it is also in the process of lobbying for additional amendments to the new Capital Finance Regulations which will be introduced in April”. Many practitioners in this area have commented that the regulations are “unbelievably complex”.

Another problem is that there is no definition of what a 'PFI deal' is – many projects which involve local authorities can be brought within the PFI label although they are not technically PFI; and it is possible to re-model deals to make them into a PFI deal.

As Jenkins & Hand partner Catherine Hand comments: “You usually had to go through hoops to ensure that a transaction did not come within the capital finance regulations; now it is advantageous for a deal to come within those regulations, and the problem is how to restructure a deal to fall within the regulations and qualify for the extra revenue support grant.”

She adds that under PFI procedures difficulties can emerge in the case of long-term infrastructure projects such as a new hospital or a road. Local authorities normally work from year to year, so if it enters into a long-term contract, any councillors elected after that decision was made can argue that it has removed their freedom of action.

There are also wider issues which 4Ps is covering, such as lobbying for changes to allow local authorities to get involved in pathfinder projects, and technical legal issues such as European procurement.

And with the acknowledgement that PFI is seen by both the Conservative and Labour Parties as inevitable with the lack of public funds, local authorities of all political complexions recognise that they will have to pull in the private sector. Perhaps it is no coincidence that 4Ps, although a cross-party organisation, has a strong Labour leaning.

Since compiling the table, PFI Report has supplied amended figures as follows: Berwin Leighton 30; SJ Berwin & Co 27; Simmons & Simmons 8 (number of projects).