A criticism of certain systems

Acriticism of systems such as BOOT and PFI is that only the larger contracting firms with large financial resources or sufficient financial backing can undertake them. Such systems also tend to utilize the services of a major contractor and his subcontractors for long periods. Consequently if the use of these forms of contract by promoters should become too widespread, there may be an insufficient number of large contractors left for proper open competition to occur for new projects, and a promoter may have difficulty in obtaining satisfactorily experienced bidders interested in a project he wishes to undertake. The smaller contractors may be forced out of business as promoters use these systems or favour work packages too large for the smaller contractors to undertake. Also the best quality subcontractors and suppliers can become tied to one or another major contractor for long periods, and not be available to serve other contractors.
The end result could reduce competition on price and quality between
contractors which is still of importance in fostering the development of innovative methods and improvements in efficiency.
An objection frequently voiced is that PFI projects must be more expensive than publicly funded projects, because the shareholders and commercial lenders financing PFI want a higher return on capital than is paid on loans raised by a public authority. However, shareholders usually provide only a small proportion of the capital required for a major project8 the rest being provided by loans from banks and other financial organizations on which the interest charges are only a little above the interest charges payable on public loans. Hence, the overall cost difference between private and public funding can be relatively modest. However precise evaluation of the cost differential is complicated because account has also to be taken of such matters as the administrative costs in setting up PFI, the different sums involved to cover risks, project maintenance and supervision thereof over a long term of years. One estimate suggests the cost of private finance is about 3 per cent higher than public finance.9 A cost difference of this order does not seem particularly significant. A more significant factor in reducing project cost is the efficiency with which promoters, designers and contractors carry out their roles.

8In the case of the Channel Tunnel, 25 per cent of the capital required was in shares, 75 per cent being in the form of loans. For the proposed modernization of Londons Tube lines, a consortium of bidding contractors are reported as aiming to provide £180 million share capital and raising £2000 million from bank loans.
9Grubb S.R.T. The private finance initiative public private partnerships

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