Financial model for private finance initiative projects applied to school buildings

Abstract

Private Finance Initiative (PFI) has become a major procurement method in the UK and worldwide. The number of signed PFI deals is growing, but competition is restricted to those companies that are able to afford the initial investment. The bidding cost of PFI projects are high, and bidding companies are not compensated if the client does not award them the project. This is the reason behind several recent high-profile tender xvithdra« als. and is considered a major barrier for private companies wanting to take part in the bidding process. There is an obvious need for a tool to enable construction organizations to participate in PFI projects; one that can support these organizations in a decision-making process that is compatible with their project selection strategies, and will allow them to bid for PFI projects with clearer goals and reduced costs. A computer-based financial model was developed to predict the cost and cash flow of PFI projects, enabling project teams to assess investment decisions at the tendering stage. The proposed model consists of four modules to identify the required building area, predict the construction cost, distribute the occupancy cost, and predict the cash flow of the project. The output of the model provides the project investment results, such as the Net Present Value (NPV), Internal Rate of Return (IRR), Debt Service Coverage Ratio (DSCR), payback period and investment growth ratio. The model can predict the unitary payment but also allows the user to define the unitary payment. The reports of the model contain the cash flow and investment ratio for both types of unitary payment. The model attempts to provide the information required to assess the feasibility and affordability of the project. It gives the private sector the chance to assess the project before they spend unrecoupable funds on the project. It allows the public sector to determine the project cost, cash flow, unitary charge, and provide the information to be used for the Public Sector Comparator. The data required for the development of the model was collected from different sources. The model was initially developed on spreadsheet software: the final version was transformed into a web-based model using the Hypertext Preprocessor (PHP) and Javascript programming languages. The completed model was then sent to many practitioners for validation and assessment of both the concept and numerical application. The responses received show the valuable role the model could play in PFI projects.Ministry of Higher Education, Saudi Arabi