This newsletter covers the period September – December 2011.

It’s difficult to determine whether we’ve reached the end of the PFI road in the UK or are simply about to embark on a new phase. On the one hand we have a diminishing pipeline with further delays to programmes such as the Priority Schools Building Programme and a review which politicians expect to come up with a new model. On the other Government Ministers continue to close existing PFI deals and even announce new ones (Crossrail). The bottom line is that Governments of any hue need a buy now pay later product, whatever it is called.

Twelve projects closed with a value of almost £3bn. This comprises two education projects, one health project, four energy projects, three social housing projects and two transport projects. This compares with eighteen projects closing in the first four months of 2011 and nine projects closing over the summer. Fifteen projects with a value of £1.5bn closed in the comparable period last year. In summary, forty projects with a value of £5.8bn closed in 2011, which is commendable for a procurement methodology which is in decline. As for the summer, energy projects dominated by number but not by value. Social housing projects also made a welcome return. Expect waste closures to be much in evidence in 2012.

Policy AND legislative developments – The Future of PFI

The summer concluded with two highly critical reports on PFI by influential House of Commons committees, following a concerted anti-PFI campaign by politicians of all parties and the media. The bottom line now is that PFI is not an acceptable procurement methodology and the search for son of PFI has begun. At the beginning of December the Government published its consultation on the Reform of the Private Finance Initiative. The Consultation Document sets out a number of objectives for its new approach including making the delivery of public facilities less expensive; having access to a wider range of financing sources; striking a better balance between risk and reward; having a greater flexibility to accommodate changing public service needs; maintaining the incentive on the private sector to deliver capital projects on time and to budget and delivering an accelerated procurement process; and asks 44 detailed questions in relation to areas of reform. Whether these objectives are consistent remains to be seen. Geoffrey Spence, the CEO of IUK has commented that what emerges will not simply be a tweak or a renaming. Responses are due by 10 February 2012. The ultimate prize will be to leverage into UK infrastructure new sources of funding such as pension funds. The Government has signed a Memorandum of Understanding with the National Association of Pension Funds and the Pension Protection Fund to discuss creating a vehicle to allow pension funds to invest in infrastructure. The groups are hoping to make a statement of progress by the 2012 budget, expected in late March. As one of the central tenets of the Consultation is that the debt markets in particular are broken (notwithstanding the financial closes during the autumn and the announcements of new PFIs particularly in transport), the success of this initiative will be crucial. The consultation is timely as ac-cording to Partnerships Bulletin, just £5bn-worth of investment is left in the Government’s PFI pipeline with only 29 schemes still in procurement.

By way of follow up to the Making Savings in operational PFI projects report, the heralded new voluntary code of conduct for the PFI industry to be published by the end of 2011 is yet to appear. How much progress will be made from this initiative remains to be seen. An update on Romford, the original pilot, would make interesting reading.

At the end of December, the Treasury Select Committee published a Report on Government OBR and NAO Responses to its Report in August 2011. It commented that the Government’s response did not fully address the Committee’s argument that anomalies in the national accounts continue to provide an incentive to pursue PFI at central government level. It also queried the introduction of Waste Infrastructure Credits following the abolition of PFI Credits as being potentially retrograde. The Government will need to be careful that any new model ticks sufficient boxes for MPs to be comfortable with it.

National Infrastructure Plan 2011

At the end of November the Government published an updated National Infrastructure Plan. This ad-dresses the issue of the UK’s infrastructure performance, sets out details of 40 priority programmes and projects, lays out plans for the transport, energy, communications and environment sectors, provides some detail as to how the planned investment might be funded and financed and addresses how to secure efficient delivery of projects. The Prime Minister has asked the Chief Secretary to the Treasury to chair a new Cabinet Committee on infrastructure to drive forward the Government’s infrastructure programme.  

While the detail in the 2011 Plan is impressive, some aspects are more a work in progress than others. The chapter on funding has fewer conclusions than one might like. As far as the pension fund initiative flagged above is concerned, it is hard to see how pension funds will invest in UK infrastructure without either an equity component or some strong guarantees on returns. Other models that have been considered are the RAB model which is unlikely to be extended beyond the regulated utilities and rail sectors to roads or flood defences and concessions including introducing some pilot toll projects.

As part of 2011 Plan, the Government also hopes to address some of the barriers to delivering new infrastructure. Foremost among these is the UK’s planning system, which, notwithstanding the enactment of the Localism Bill, remains in flux. The Localism Bill was an opportunity to streamline the regime set up by the Planning Act 2008 in view of the abolition of the Infrastructure Planning Commission but this has not been seized. Below the IPC threshold the Government continues to grapple with simplifying the rules with its draft National Planning Policy Framework, which is currently being rewritten.  

Legislation

Health and Social Care Bill

The Health and Social Care Bill began its passage through the Lords in September and entered the Committee Stage on 11 October. In general, terms few changes have been made to the form of the Bill but a number of assurances have been given. It seems likely that the Bill will enacted in the form it emerged from the period of reflection in the late summer. Those involved in the health sector should prepare to deal with the new entities created by the Bill. The Bill continues to be criticised both for being too radical and for not being radical enough (who thinks that the Clinical Commissioning Groups are beginning to look like PCTs?). The House of Lords Constitution Committee has published a report calling for changes to the Bill to ensure that ministerial responsibility to Parliament and legal accountability for the NHS are not diluted.  

Localism Act 2011

The Localism Bill received Royal Assent on 15 November. So far one commencement order has been made pursuant to the Act, The Localism Act (Commencement No. 1 and Transitional Provisions) Order 2011, SI 2011/2896. The only significant provisions in effect so far relate to new governance arrangements for English local authorities and Council Tax referenda.

Public Bodies Act 2011

The Public Bodies Act 2011 received Royal Assent on 14 December. The Act provides wide ranging powers in relation to the abolition of public bodies including those set out in the Schedules.

Public Procurement

On 20 December the EU Commission published a Proposal for new Public Procurement Directives re-placing the existing directives, 2004/17/EC and 2004/18/EC. This follows a year long consultation commencing in January 2011. The proposal provides, inter alia, for the simplification and flexibilisation of procurement procedures, the strategic use of public procurement in response to new challenges, better access for SMEs and Start Ups. The UK Government has published Procurement Policy Note 11/11 in re-sponse to the Proposal.

Green Investment Bank

The 2011 Plan provided an update on the Green Investment Bank which will now start in April 2012 ahead of state aid approval by the EU Commission. The Government will provide it with £775m of the £3bn funding already confirmed. In December, the Government published what the Green Investment Bank’s first priorities will be until 2016, in addition to the criteria for where it will be located. As anticipated, initial sectors to be supported, subject to approval by the European Commission, will be offshore wind power generation, commercial and industrial waste processing and recycling, energy from waste generation, nondomestic energy efficiency and support for the Green Deal.  

Local Government Resource Review

In December, the Government published its Response following its consultation on the LGRR. As far as Tax Increment Financing is concerned, there will be two options, Option 1 where local authorities could borrow against their income within the business rate retention scheme, whilst Option 2 would allow a limited number of TIF schemes to be permitted where the business rates growth would not be subject to the levy or reset for a defined period of time. Detail on Option 2 is awaited. TIF powers will not be available until April 2013. At the same time the Government published a Local Government Finance Bill to implement the Review. TIF may help projects such as the £1bn Northern Line Extension, where the sponsor, Treasury Holdings went into administration in December, to proceed.  

Defence

Defence has become a PFI-free zone. In November, the Ministry of Defence abandoned PFI plans for a multi-billion pound project to operate and maintain air traffic control for the UK’s armed forces (Project Marshall). Also in November the MoD announced that the £3bn Search and Rescue Helicopter project will not proceed on a PFI basis. The original PFI project was scrapped in February 2011 due to ‘irregularities’ in the bidding process, which saw a consortium made up of CHC Helicopter, Thales, and Sikorsky, eliminated. Both projects will now be funded on a conventional basis. What this means if that there are no defence PFI projects in procurement or expected to be advertised in 2012 although PFI will remain an option.

Education

Full details of the Priority Schools Building Programme (PSBP) under which schools will receive funding for £2bn worth of new building projects are now overdue. The programme is expected to buy schools in batches. It is possible that the PSBP will follow the Scottish Futures Trust’s non-profit distributing model.  

In November the Academies Act 2011 received royal assent. A last minute amendment to the Act clarifies that local authorities may contribute to the expenses of academies. Since the Coalition came into power more than 1300 academies have been created. This compares with 203 academies being created under the last Government.

Two projects closed. In November, Hochtief and Laing O’Rourke reached financial close on the £83m second phase of Salford City Council’s BSF programme. Under this the consortium will design, finance, build and operate four new schools in Salford, Greater Manchester. Senior debt is being provided by Nord LB. In December, Reading University reached financial close on a £200m scheme to redevelop student accommodation in Reading. The project will see Universities Partnership Programme manage 3,426 rooms of existing accommodation, as well as the construction and management of a further 898 rooms at the Childs Hall campus, as part of the Reading University Student Village. Institutional investor Aviva has provided £184m in debt for the project.  

Energy

On 18 October the Energy Act 2011 received Royal Assent. The Act provides for various elements of the Green Deal including a step change in the provision of energy efficiency measures to homes and businesses, and makes improvements to our framework to enable and secure low-carbon energy supplies and fair competition in the energy markets. On 15 December the Government published a Technical Update to its Energy Market Reform programme. However, the major news was the slashing of feed-in tariffs in October and the subsequent successful judicial review leaving the policy in disarray.  

Four projects closed. In September, Green Frog Power reached financial close on a £80m financing pack-age to fund the construction of a 214MW portfolio of diesel-powered short-term operating reserve electricity plants in the UK in the North East and South Wales. Senior debt is being provided by RBS. Also in September, Transmission Capital Partners, the consortium comprising International Public Partnerships Limited (INPP), Amber Infrastructure and Transmission Capital, reached financial close on the £43m Barrow offshore transmission project. Senior debt of £35m has been provided equally by Barclays, BNP Paribas and Lloyds. In October, Blue Transmission, a consortium comprising Macquarie Capital and Bar-clays, reached financial close on the £125m Walney 1 Wind Farm Transmission Link. In December, HgCapital reached Financial Close Financial close on the £32m Hall Farm Wind Project with debt provided by RBS.

Health

One project closed in the health sector. In December, the £30m Leeds Holt Park Wellbeing Centre PFI reached financial close with Interserve. Senior Debt is being provided by the Co-operative Bank. Preferred bidders were appointed for the Ludlow Healthcare Facility PPP and the £500m East Central Hub procurement scheme in Scotland. In a potentially significant development, Assured Guaranty replaced Ambac as the guarantor for the Worcester hospital project bonds in January, the first monocline transaction in Europe since the credit crunch. A number of projects remain at short list. While a small number of PFIs are being pursued in the health sector, the mood music remains anti-PFI with the Health Secretary stating in September that as many as 22 NHS Trusts are struggling to keep up repayments linked to their PFI contracts. This is as much due to the way that NHS Trusts are funded as to the contracts themselves. In December, the Public Accounts Committee published a report, ‘Achievement of Foundation Trust Status by NHS Hospital Trusts’ which stated that the cost of PFIs was an additional challenge for a number of NHS Trusts.

Other accommodation

No projects closed in the other accommodation project sector. In December, West Yorkshire Police Authority announced Interserve Investments as the preferred bidder for its £100m West Yorkshire Police Accommodation PFI project.

Social Housing

After a fallow period, three projects reached financial close in December. Inspiral, a consortium comprising Regenter, Great Places Housing Group and Wates Living Group, reached financial close on the £130m Gateways to Oldham PFI project. The project involves the construction of both social and private housing and the renovation and maintenance of existing council homes in the Oldham area. Financing for the project has been provided by Santander, Cooperative Bank and Barclays. A Regenter-led consortium also reached financial close on the £80m Kirklees Excellent Homes for Life PFI. The project involves the provision of 500 new rented housing units across Kirklees in West Yorkshire. Co-operative Bank, Nord LB and Nationwide have provided £72m of senior debt. Finally, Sarsen Housing reached financial close on the £49m Wiltshire Social Housing PFI, which involves 350 new homes. Debt was provided by Bar-clays. Leeds City Council appointed a preferred bidder for its £180m Little London, Beeston Hill and Holbeck project.

Street Lighting and Highway Maintenance

No projects advanced in the street lighting and highway maintenance sector. There are no street lighting projects and only three highways maintenance projects (Hounslow, Sheffield and Isle of Wight) currently in procurement.  

Transport

Two projects closed. In December, a consortium comprising among others Vinci Investments, Alstom Transport and Keolis reached financial close for the £570m Line Two Nottingham Tram PFI project. Sen-ior debt will be provided by BBVA, BTMU, Credit Agricole and RBS together with the EIB, which is providing £100m in funding. The winning consortium will take over Line 1 from Arrow. Also in December, DP World reached financial close on the £1.5bn London Gateway port project. Senior debt is being provided by RBS, SocGen, Investec, HSH Nordbank, UniCredit, DNB NOR Bank, NAB, and WestLB with EIB also providing a £100m. DP World is developing what is set to be Europe’s largest logistics park near the site.

PFI had mixed fortunes in the transport sector. In September it was confirmed that Scotland’s Borders Rail project will no longer be delivered through the planned non-profit distributing model, but will in-stead use the regulated asset base approach. Network Rail and Borders Rail will work together to deliver the £295m project. Around the same time, the Government, approved the use of PFI for the £600m Mersey Gateway PPP project. Halton BC launched a tender for the project later that month. The deadline for prequalifications was 14 December and confirmation of the shortlist is awaited. Finally, in December, new Transport Secretary Justine Greening gave the go-ahead to PFI funding for the Crossrail rolling stock project. An invitation to tender will be launched in the New Year.  

One of the reasons for the delay in the Crossrail rolling stock project is the continuing fallout from the Thameslink rolling stock project, which appointed a preferred bidder last summer. The House of Commons Transport Select Committee published its report on UK rolling stock procurement in December. Its conclusions included that Siemens’ A+ credit rating almost certainly made a significant contribution to its success in winning the Thameslink procurement and that the bundling of train manufacture and financing together in large procurement exercises will skew the market towards larger multinational firms, possibly at the expense of excellence in train design and domestic manufacturing; the Government should clarify whether the medium term procurement plans mentioned in the Chancellor’s Autumn Statement include a plan for rolling stock; and the Government must do more to ensure that UK-based companies in, or sup-plying, the train building sector enjoy a steadier flow of business opportunities including new projects before the next major train procurement.  

In transport, as elsewhere, the search for new funding routes continues. In Nottingham, the first Work-place Parking Levy scheme in the UK went live in October although funding will not be collected before April 2012. In November, a report from the Highways Agency called for new road routes to be developed as toll roads in the face of spending cuts in road network maintenance. This was followed by an announcement in the Autumn Statement and the launch of a trial by the DfT of tolling on the A14 in Cambridgeshire. The results of the study are to be published in summer 2012.

Finally, it is worth noting that the Government has approved a far greater number of local transport schemes in the last 12 months than anyone might have expected. Of the schemes that made it to the Development Pool in January 2011, all but 4 have been approved, albeit some with local contributions.  

Waste

No projects reached financial close but six projects advanced to preferred bidder with councils in South Lanarkshire (Viridor) Leeds (Veolia) Bradford and Calderdale Councils (Skanska, Aecom and Waste Re-cycling Group), Gloucestershire (Urbaser and Balfour Beatty South London through the South London Waste Partnership (Viridor) and Essex (Balfour Beatty and Urbaser) all appointing preferred bidders. There are now more than a dozen projects at this stage waiting to close some of which have been at preferred bidder for more than 3 years.  

Elsewhere waste projects continue to face challenges. Following the appointment of a preferred bidder the procurement process for South Lanarkshire’s waste contract was suspended due to a legal challenge on the basis that the contract differs from that advertised. In North Yorkshire, two York Green Party councillors have submitted formal objections to the planned £330m Allerton Waste Recovery Park in North Yorkshire. Finally, in some better news, the Administrative Court at the Royal Courts of Justice has ruled against a judicial review into Norfolk County Council’s decision to select Cory Wheelabrator as preferred bidder for the Norfolk Waste PFI.

Water

In the Water Sector, in October, Canadian Capstone Infrastructure Corporation acquired Bristol Water from Suez for CA$215m. In December Macquarie sold a 9.9% stake in Thames Water to the Abu Dhabi Investment Authority. In January, in a move attracting rather greater press coverage, Macquarie sold a further stake of 8.68% to China Investment Corporation. Macquarie acquired Thames Water from RWE in 2006 and continues to manage the company.