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PFI's premiers
14:03 16 Apr 2003
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Just over a decade ago, with the economy in the depths of
recession, few could have imagined that a revolution was about to
take place in public sector procurement, that would transform its
whole approach to major construction projects.
At the time, the public purse was almost empty. So, under-fire Tory chancellor Norman Lamont suggested that the Design, Build, Finance and Operate model that had been used successfully on Trafalgar House's Dartford Crossing could be considered for other building projects such as roads, and even schools and hospitals.
But while the Tories saw DBFO, or the private finance initiative as it would rapidly become known, largely as a means of getting public capital expenditure off the balance sheet, the New Labour administration that succeeded them in 1997 was convinced it had wider benefits in terms of the quality of the building projects it could deliver.
And, despite a bitter battle between New Labour and many of its traditional supporters - notably the unions - they have remained unshaken in that belief.
Consequently, under this government, PFI has really taken off. About £14bn-worth of public sector construction work has been signed off or reached preferred bidder status in the past decade, the majority of it since 1997.
In most cases, PFI has been hugely successful for construction companies. In the early days, many were able to exploit loopholes in contracts - as Carillion did in refinancing its Fazakerley prison deal - to boost their margins considerably.
Boom in other areas
PFI has also heralded a boom in other areas. As most PFI contracts also package in facilities management deals, many contractors active in PFI have either bought into or rapidly expanded their FM capabilities; a PFI deal is often worth much more to a contractor than just its construction value.
Not that there haven't been a few problems on the contractor side - Laing's disastrous National Physical Laboratory experiment being the most notable. Some sectors have proved difficult to apply the PFI model, such as social housing refurbishments, which has only recently seen the first of its much heralded pathfinders reach close, four years after being advertised.
But generally, it has been positive news. The main table shows the contractors that have performed most successfully in PFI over the past decade or so.
Perhaps not surprisingly, the top end of the table is dominated by the big names in UK construction - indeed it is not far different from the top of the CJ50 table. Capacity is clearly all important when it comes to taking on the bigger PFI deals, particularly the large hospitals and government buildings.
But that said, most of the successful PFI players have also chosen to specialise in a particular sector - and this applies to some smaller and medium-sized contractors too, suggesting perhaps, that PFI need not be a market exclusive to the big boys.
Skanska tops the pile with almost £1.5bn-worth of PFI construction business (although this is partly due to the inclusion in its tally of PFI deals signed by two firms it acquired in the past 10 years - Trafalgar House and Kvaerner).
Despite this huge return, Skanska's PFI strategy was initially fairly cautious. It has been hugely successful in targeting the prisons sector, where it has secured six of the 15 contracts awarded to date. But on all of its prison deals, Skanska comes on board as design and build contractor for the Premier Prisons consortium, thereby keeping its bid costs - and risks - to a minimum. The fact that prisons have been regarded as one of the real success stories of PFI has been an added PR bonus for the firm.
Rising ambitions
More recently, Skanska's ambitions have risen significantly, certainly in terms of contract size. Last summer, it landed the £177m South Derbyshire hospital deal, to add to the £344m Walsgrave hospital in Coventry, the largest PFI deal in the health sector to be tackled by a single contractor. It is now the biggest player in health PFIs.
Not much separates the next four firms in the table. Amec and Balfour Beatty, in second and third respectively, are joint venture partners on the biggest health PFI award to date, the £422m University College London Hospital. Balfour in particular, has been prolific in the health sector, with five deals worth more than £500m collectively.
Amec has been most successful in infrastructure, which it tops by some distance, mainly on the back of six roads deals, including the M6 Toll, where it is again working alongside Balfour Beatty, plus Carillion and Alfred McAlpine.
Laing finishes fourth, although it has generated most of its PFI publicity on the back of the one that went wrong, the National Physical Laboratory at Teddington. It has secured major deals across most sectors, hospitals at Norwich and Newcastle-upon-Tyne, the MoD's Joint Service Command and Staff HQ, plus three big roads contracts. It has also been successful in targeting police stations, winning almost £200m worth of business in the sector.
Fifth-placed Carillion has taken a similar wide spread of deals, although its biggest win by far was the £330m GCHQ in Cheltenham, which accounts for almost a third of the value of all its PFI deals. Carillion has also been a significant player in the roads market, and health, and it has just claimed preferred bidder status on its first schools PFI, worth £25m in Harrow.
Top marks for Jarvis
The remarkable performance of Jarvis, in sixth place, proves that a comparatively medium-sized contractor can use PFI to expand into a major player. The real success story with Jarvis, of course, has been its targeting of the education sector. With 23 deals in the sector so far, including not only schools and colleges but some university accommodation work too, it is way ahead of the rest of the field. Its policy of building a reputation as a specialist in this sector has proved hugely profitable, and it has continued to win work over the last year, confounding some predictions that the fallout from Potters Bar might taint its overall business performance.
Another firm that has expanded successfully on the back of PFI, to a point where it can now be considered one of the big boys, is Interserve, 10th in the table. It has increased its PFI business cautiously, successfully targeting the comparatively low-risk prisons sector, but the real catalyst for its rapid growth of the past couple of years was the acquisition of armed forces FM specialist Building & Property Group in December 2000. Most recently, that has helped it secure the £30m Army Sixth Form College PFI at Loughborough, and the £47m Armada naval accommodation deal at Plymouth.
Of the other contractors in the top 10, Bovis Lend Lease has been particularly successful in the health market, where it is second behind Skanska, while Alfred McAlpine has targetted roads, winning deals worth more than £400m in total, including several joint ventures with Amec. Sir Robert McAlpine's largest PFI win is still at preferred bidder stage, the £200m Colchester barracks scheme.
Outside the top 10, a number of medium-sized contractors have made an impact in the market by focusing on one or two key sectors. Wates, for instance, has picked up all its £205m-worth of PFI business in schools as part of the NewSchools consortium, and Ballast has secured the majority of its PFI business in education, where its haul of eight contracts puts it second to Jarvis in the sector. HBG has taken more than three-quarters of its PFI business, worth £175m, from the Home Office, in the form of courts and police station packages.
Regional players also do well
Two mainly regional players, Miller and Robertson, have also been successful in targeting education, while the latter has recently branched into health, where it is preferred bidder on four deals worth £38m collectively. It shows that there is life yet for the smaller contractor in PFI.
Perhaps the most interesting recent development though, with a view to the future make-up of the whole PFI market, has been the arrival on the scene of a couple of global giants: Bouygues, which took the £250m medical schools deal for Kings College, Guy's and St Thomas' Hospitals; and Kajima, now preferred bidder on five PFI deals, including the £55m Health & Safety Executive HQ in Bootle.
One thing is certain: it is a market that will continue to expand. New Labour has pinned its colours firmly to the PFI mast and seems to be winning the battle to convince the unions of its worth. The market continues to mature, and the signs are that public sector clients are slowly becoming more sophisticated in their approach to procuring PFI deals, with the NHS LIFT programme probably the most innovative model yet (see 'LIFT off' page 22).
The downside to this, is that as the client becomes more intelligent, so it will become harder to achieve the kinds of profits that were returned on the early PFIs. A more modest return is likely in future.
The question is, how modest? If public sector clients attempt to screw down contractors' margins too tightly, then they will either scare off bidders, or stifle the private sector innovation that the PFI model was originally designed to encourage.
Something perhaps, for the government to ponder as we enter the second decade of the private finance initiative. n
At the time, the public purse was almost empty. So, under-fire Tory chancellor Norman Lamont suggested that the Design, Build, Finance and Operate model that had been used successfully on Trafalgar House's Dartford Crossing could be considered for other building projects such as roads, and even schools and hospitals.
But while the Tories saw DBFO, or the private finance initiative as it would rapidly become known, largely as a means of getting public capital expenditure off the balance sheet, the New Labour administration that succeeded them in 1997 was convinced it had wider benefits in terms of the quality of the building projects it could deliver.
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And, despite a bitter battle between New Labour and many of its traditional supporters - notably the unions - they have remained unshaken in that belief.
Consequently, under this government, PFI has really taken off. About £14bn-worth of public sector construction work has been signed off or reached preferred bidder status in the past decade, the majority of it since 1997.
In most cases, PFI has been hugely successful for construction companies. In the early days, many were able to exploit loopholes in contracts - as Carillion did in refinancing its Fazakerley prison deal - to boost their margins considerably.
Boom in other areas
PFI has also heralded a boom in other areas. As most PFI contracts also package in facilities management deals, many contractors active in PFI have either bought into or rapidly expanded their FM capabilities; a PFI deal is often worth much more to a contractor than just its construction value.
Not that there haven't been a few problems on the contractor side - Laing's disastrous National Physical Laboratory experiment being the most notable. Some sectors have proved difficult to apply the PFI model, such as social housing refurbishments, which has only recently seen the first of its much heralded pathfinders reach close, four years after being advertised.
But generally, it has been positive news. The main table shows the contractors that have performed most successfully in PFI over the past decade or so.
Perhaps not surprisingly, the top end of the table is dominated by the big names in UK construction - indeed it is not far different from the top of the CJ50 table. Capacity is clearly all important when it comes to taking on the bigger PFI deals, particularly the large hospitals and government buildings.
But that said, most of the successful PFI players have also chosen to specialise in a particular sector - and this applies to some smaller and medium-sized contractors too, suggesting perhaps, that PFI need not be a market exclusive to the big boys.
Skanska tops the pile with almost £1.5bn-worth of PFI construction business (although this is partly due to the inclusion in its tally of PFI deals signed by two firms it acquired in the past 10 years - Trafalgar House and Kvaerner).
Despite this huge return, Skanska's PFI strategy was initially fairly cautious. It has been hugely successful in targeting the prisons sector, where it has secured six of the 15 contracts awarded to date. But on all of its prison deals, Skanska comes on board as design and build contractor for the Premier Prisons consortium, thereby keeping its bid costs - and risks - to a minimum. The fact that prisons have been regarded as one of the real success stories of PFI has been an added PR bonus for the firm.
Rising ambitions
More recently, Skanska's ambitions have risen significantly, certainly in terms of contract size. Last summer, it landed the £177m South Derbyshire hospital deal, to add to the £344m Walsgrave hospital in Coventry, the largest PFI deal in the health sector to be tackled by a single contractor. It is now the biggest player in health PFIs.
Not much separates the next four firms in the table. Amec and Balfour Beatty, in second and third respectively, are joint venture partners on the biggest health PFI award to date, the £422m University College London Hospital. Balfour in particular, has been prolific in the health sector, with five deals worth more than £500m collectively.
Amec has been most successful in infrastructure, which it tops by some distance, mainly on the back of six roads deals, including the M6 Toll, where it is again working alongside Balfour Beatty, plus Carillion and Alfred McAlpine.
Laing finishes fourth, although it has generated most of its PFI publicity on the back of the one that went wrong, the National Physical Laboratory at Teddington. It has secured major deals across most sectors, hospitals at Norwich and Newcastle-upon-Tyne, the MoD's Joint Service Command and Staff HQ, plus three big roads contracts. It has also been successful in targeting police stations, winning almost £200m worth of business in the sector.
Fifth-placed Carillion has taken a similar wide spread of deals, although its biggest win by far was the £330m GCHQ in Cheltenham, which accounts for almost a third of the value of all its PFI deals. Carillion has also been a significant player in the roads market, and health, and it has just claimed preferred bidder status on its first schools PFI, worth £25m in Harrow.
Top marks for Jarvis
The remarkable performance of Jarvis, in sixth place, proves that a comparatively medium-sized contractor can use PFI to expand into a major player. The real success story with Jarvis, of course, has been its targeting of the education sector. With 23 deals in the sector so far, including not only schools and colleges but some university accommodation work too, it is way ahead of the rest of the field. Its policy of building a reputation as a specialist in this sector has proved hugely profitable, and it has continued to win work over the last year, confounding some predictions that the fallout from Potters Bar might taint its overall business performance.
Another firm that has expanded successfully on the back of PFI, to a point where it can now be considered one of the big boys, is Interserve, 10th in the table. It has increased its PFI business cautiously, successfully targeting the comparatively low-risk prisons sector, but the real catalyst for its rapid growth of the past couple of years was the acquisition of armed forces FM specialist Building & Property Group in December 2000. Most recently, that has helped it secure the £30m Army Sixth Form College PFI at Loughborough, and the £47m Armada naval accommodation deal at Plymouth.
Of the other contractors in the top 10, Bovis Lend Lease has been particularly successful in the health market, where it is second behind Skanska, while Alfred McAlpine has targetted roads, winning deals worth more than £400m in total, including several joint ventures with Amec. Sir Robert McAlpine's largest PFI win is still at preferred bidder stage, the £200m Colchester barracks scheme.
Outside the top 10, a number of medium-sized contractors have made an impact in the market by focusing on one or two key sectors. Wates, for instance, has picked up all its £205m-worth of PFI business in schools as part of the NewSchools consortium, and Ballast has secured the majority of its PFI business in education, where its haul of eight contracts puts it second to Jarvis in the sector. HBG has taken more than three-quarters of its PFI business, worth £175m, from the Home Office, in the form of courts and police station packages.
Regional players also do well
Two mainly regional players, Miller and Robertson, have also been successful in targeting education, while the latter has recently branched into health, where it is preferred bidder on four deals worth £38m collectively. It shows that there is life yet for the smaller contractor in PFI.
Perhaps the most interesting recent development though, with a view to the future make-up of the whole PFI market, has been the arrival on the scene of a couple of global giants: Bouygues, which took the £250m medical schools deal for Kings College, Guy's and St Thomas' Hospitals; and Kajima, now preferred bidder on five PFI deals, including the £55m Health & Safety Executive HQ in Bootle.
One thing is certain: it is a market that will continue to expand. New Labour has pinned its colours firmly to the PFI mast and seems to be winning the battle to convince the unions of its worth. The market continues to mature, and the signs are that public sector clients are slowly becoming more sophisticated in their approach to procuring PFI deals, with the NHS LIFT programme probably the most innovative model yet (see 'LIFT off' page 22).
The downside to this, is that as the client becomes more intelligent, so it will become harder to achieve the kinds of profits that were returned on the early PFIs. A more modest return is likely in future.
The question is, how modest? If public sector clients attempt to screw down contractors' margins too tightly, then they will either scare off bidders, or stifle the private sector innovation that the PFI model was originally designed to encourage.
Something perhaps, for the government to ponder as we enter the second decade of the private finance initiative. n
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