Correlation Analysis of Capital and Life Cycle Costs in Private Financial Initiative Projects

Abstract

Although private financial initiative (PFI) projects have proved to be more expensive to build, the U.K. government believed that it can spend more for less, delivering better value for money (VFM) to public projects. The underlying philosophy is that increased specification of a new asset increases construction costs but redu1ces future cost-of-use, such as the life cycle replacement (LCR) cost of the asset. However, there is a lack of research about whether higher initial capital costs indeed result in a lower long-term LCR cost of PFI projects in practice. In order to discover the relationships between the capital costs of PFI projects and their LCR costs over the concession period, a sample of 30 live PFI projects are selected randomly for correlation analysis. Contrary to the hypothesized negative relationship, a positive correlation is found between the two variables. In order to review the current cost estimate practice, the cost models for LCR costs are reviewed and surveys are carried out to investigate the issues surrounding cost estimates further.