Changes to the PFI regime ("PF2") - hindsight is a wonderful thing
PFI involves procurement of project finance using private sector debt and equity underwritten by the public in order to deliver public services. It was implemented in the UK for the first time in 1992 by John Major's Conservative Government and was then enthusiastically rolled out for a variety of projects including prisons, hospitals and private motorways.
Twenty years on the system is overdue for reform following adverse financial reports, below par services, and has been blamed for a number of high profile institutional failures (such as South London NHS Hospital placed into administration earlier this year). This, and the dearth of affordable bank finance, has meant that a number of significant public sector developments have been placed on hold.
Following consultation with major stakeholders, industry bodies, and finance providers over the last 12 months the Coalition has announced in its Autumn Statement some important changes to the PFI regime - known as "PF2" with a view to opening up new areas of investment and ensuring projects are run on a more controlled and transparent basis. This balances the validity of private sector expertise in the sector - with it a requirement to limit the costs.
Detailed guidance is not yet available but the main points are summarised below:
- To address the criticism that public sector bodies have in the past sold assets down the river - going forward the Government will take an equity stake and place executives onto the boards of the Project Co's in order to ensure the taxpayers receive a share of profits and are involved in decision-making. There will also be an increased transparency requirement with an obligation to disclose actual and forecasted profits.
- Just as the planning system on major infrastructure projects is being expedited - going forward PF2 projects will be subject to an 18 month procurement period - following which funding will be withdrawn. This is in order to ensure a shorter time to delivery and most likely ties in with the recently announced changes to the planning regime for "major projects". The long stop is clearly an area of risk for parties having to fund bid proposals where costs can quickly run up. Whilst this will provide an impetus on authorities to conclude negotiations quickly - we consider that changes to current procurement legislative processes are likely to be required to procure a £100 million pound complex development project during this timeframe - also are the relevant public bodies resourced to run an expedited procurement process with sufficient numbers of bidders?
- With a view to opening up the market to alternative types of investment such as pension fund money - after the design phase has been settled - there are to be funding competitions. We query whether this is in fact a second procurement phase and will lead to consequent delay? The Government is somewhat optimistic that funding will be available for chosen projects and is ignoring the fact that in some cases funding availability will be limited by design and structure.
- Unsurprisingly following the "£300 to change a light bulb " headline and the damning report of the Treasury Select Committee in September 2011 - the lucrative associated long term Facilities Management and Soft Services Contracts are to be removed from the Private Finance regime and will be separately procured on shorter contracts on a "value for money" basis.
Our next update will focus on new property taxes and an abolition of mansion tax, and the rating relief on new commercial properties.