£845 for a Christmas tree! For years the press has carried negative stories about the UK private finance initiative (PFI) and the cost to the taxpayer. But, with infrastructure expenditure now seen as a catalyst to restoring economic growth to a flat-lining economy, the Government has revisited the maligned PFI.
In December 2012 the Treasury published new guidance, "A New Approach to Public Private Partnership" (the Guidance), with the intention of reinvigorating the PFI programme, now re-christened "PF2".
The Treasury remains firmly committed to private sector involvement in infrastructure projects in the UK. But the Guidance aims to address a widespread concern that PFI has not delivered to the public sector value for money or a fair deal. It also looks at the challenges of long-term funding for PF2 projects in the current market.
In the Guidance, the Treasury proposes the following measures to address these concerns:
- Public sector equity participation in PF2 projects. The public sector will take between 30 and 49 per cent. of equity in certain projects through a central Treasury unit, in effect sharing in the upside of these projects.
- Flexible service provision. This is intended to address concerns about the public sector being locked into inflexible 20-year-plus contracts. The private sector will continue to build and maintain the asset, but the provision of services such as cleaning and catering will now be procured separately.
- Greater transparency. The private sector will be required to provide information on actual and projected equity returns.
- Revisiting risk allocation within contracts. The public sector will now manage and assume certain risks (such as capital expenditure resulting from change in law) which previously it required the private sector to manage – risks which are arguably remote, but which bidders have had to price for in the past. The intention is to improve value for money.
- Streamlined procurement. To address the private sector’s concern at high bid costs the Treasury is committing to faster and cheaper procurement through the promotion of capacity enhancement, increased standardisation of contractual documentation and greater oversight and scrutiny by the Treasury.
The Guidance also sets out the Treasury’s vision on the future of long-term debt finance for long-term PF2 projects. Long-term debt has been the principal means of financing PFI projects since the withdrawal of the monolines from this sector. The Treasury remains committed to its use. It has dismissed the use of short-term financing, because the public sector will not accept refinancing risk as it argues that it does not represent value for money, despite being more readily available.
However, the Treasury is actively exploring alternative (and competitively priced) financing structures to supplement this traditional long-term debt model.
The value of the private sector disciplines in undertaking whole-life project due diligence is recognised. It is now seen as a tool to allow projects to gain access to alternative sources of long-term finance.
So what are these alternative sources of finance that the Treasury is promoting? PF2 is now to be structured on the equity side to "secure long-term debt on cost-efficient terms".
The Treasury hopes PFI projects in the future will be financed through a combination of the following:
- Institutional investors (such as pension funds). The Treasury recognises challenges exist with resourcing and the risks inherent with greenfield projects. Equity funding competitions to attract institutional investment are to be introduced.
- The European Investment Bank (EIB). The products offered by the EIB include direct loans, intermediated loans, guarantees and credit enhancement facilities.
- Commercial banks. The Treasury envisages commercial banks developing new products (such as construction related guarantees and mezzanine finance) to make projects more attractive to institutional investors by reducing risk.
- The Treasury. The Treasury will increase its own capital contributions. In the short term, it will also provide guarantees for "nationally significant" projects which are "shovel ready" and co-lend in certain circumstances.
The new proposals are evolutionary rather than revolutionary. Increased transparency and the public sector sharing in the upside should result in less political rhetoric. The PFI Industry has broadly welcomed the proposals, but in the end the real concern is the lack of a robust pipeline of projects over the next few years.