A crucial role in PFI projects

Actuaries are now playing a crucial role in guiding public sector bodies through the complexities of the Private Finance Initiative (PFI). They make valuable contribution to the analysis and successful realisation of PFI projects on behalf of Government departments, NHS Trusts and Local Authorities.

What actuaries do

Actuaries are trained to make financial sense of the future, applying sophisticated statistical techniques to complex financial systems. They have the ability to distil clearly the key issues and shape informed business judgement.

Their expertise gives them unrivalled appreciation of the key area of business risk management. Actuaries are able to analyse past events, assess the present risks involved, and model what could happen in the future. They can then forecast the long-term financial implications of business decisions.

Traditionally focused on the insurance and pensions industry, actuarial skills are now being applied to many other areas of business such as corporate finance, investment, healthcare, derivatives and major capital projects. Wherever long-term cash flows are involved, an actuarial perspective can be highly beneficial.

Actuaries balance their role in business management with responsibility for safeguarding the financial interests of the public. They are legally bound to protect the benefits promised by insurance companies and pension schemes, and their professional reputation for independence and integrity is pre-eminent.

How these skills are applied to the PFI

Actuaries see projects as a consistent whole rather than from a single perspective. They can guide the overall process to produce an effective proposal.

The particular skills they can bring to the PFI include project appraisal, risk assessment and risk quantification, the apportionment of risk between public and private sectors, the development of appropriate payment mechanisms, construction of public sector comparators, negotiation support, the development of financial models, determination of value for money and so on.

Advice in practice

Assignments carried out or being undertaken on behalf of public sector bodies in PFI include:

• Financial and risk advice on procurement of a major development for a large NHS Trust, including evaluation of tenders and of the standing of bidders.
• Advice to HM Customs and Excise on how risk should be handled in a major IT procurement, on whether a PFI approach would offer value for money and on the development of appropriate payment mechanisms.
• Advice to the NHS Executive on how to price risk transfer in assessing value for money in PFI transactions, and how to protect future strategic developments within an existing PFI exercise.
• Advice to the National Audit Office on their report into the first four Design, Build, Finance and Operate (DBFO) road projects.
• Financial advice on the procurement of new facilities for a Community Health Care Trust.
• Preparing a detailed report for the Audit Commission on the issues for auditors in PFI transactions.
• Chairing a workshop for NHS Trusts on systems projects and reporting back to the Information Management Group of the NHS Executive.

Actuaries have also worked extensively with private sector bidders for PFI contracts in areas such as risk identification and pricing, and financial modelling.

Seeking actuarial advice

Actuarial advice will be particularly helpful in circumstances such as:

• Undertaking the initial pre-procurement project appraisal stage, particularly to ascertain whether risks have been properly assessed and taken into account, and how they will be handled in the ongoing process.
• Considering if a PFI approach to procurement is likely to work well in practice and deliver value for money.
• Developing output specifications and appropriate payment mechanisms that properly reflect the desired approach to risk allocation.
• Creating public sector comparators, and business and financial models to compare competing bids and assess value for money.
• Supporting the negotiation team; preparing the Full Business Case; and assessing the insurance arrangements for the project.

Seeking actuarial advice

For an informal discussion (without any obligation) on the possibility of obtaining actuarial help, please contact:

Mark Symons, Institute of Actuaries, Staple Inn Hall, High Holborn, London WC1V 7QJ
mark.symons@actuaries.org.uk
Tel: +44 (0)20 7632 2133
Fax: +44 (0)20 7632 2131