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Overview

i History

The UK was one of the pioneers of public–private partnerships (PPPs) in the early 1990s, although the private financing of infrastructure had occurred before this. The Conservative governments in the 1980s and early 1990s had embarked on an extensive privatisation programme of publicly owned utilities, including telecoms, gas, electricity, water and waste, airports and railways. In addition, there were a small number of free-standing transport infrastructure concessions2 where the concessionaire relied on end-user revenue for its return, rather than payments from the public sector.

The term PPP is used in the UK to describe a variety of different forms of public–private sector cooperation. This chapter focuses chiefly on the private finance initiative (PFI) and its successors, given their widespread use and influence on other models used in the UK. PFIs, which were launched in 1992, are design-build-finance-operate projects structured as a purchase by the public sector of ongoing services, rather than capital assets, with these services defined as outputs.3 Service payments are principally met from public funds rather than end user charges.

In 2012, the government launched a revised PFI model called PF2, which closely resembled the PFI model but involved a number of changes designed to increase transparency, promote efficiency, ensure value for money and encourage finance from alternative sources of institutional capital (such as infrastructure and pension funds).

The use of PFI/PF2 has been heavily affected by changing political sentiments over the years. In the 2018 Budget, the then Chancellor of the Exchequer announced that PFI/PF2 would no longer be used to deliver new infrastructure. This remains the government's position, but alternative models continue to be used, and government has stated that it will consider new private finance models as well as how the existing models can be applied in new areas. The future of PPPs in the UK is considered in Section VIII.

ii Regional variations

The devolved administrations in Wales, Scotland and Northern Ireland are not bound to follow UK government policy on PFI and have the capability to use alternative models (as does Transport for London). The Welsh government is currently using a mutual investment model (MIM), with the first project delivered under the MIM reaching financial close during 2020 and the 21st Century Schools and Colleges Programme (which will use the model) underway. The Scottish government has previously used the non-profit distributing (NPD) model, under which there is no dividend-bearing equity, and returns for private sector participants are capped. However, the Scottish government adopted the MIM in 2019, which will be used in future projects, alongside other available infrastructure investment tools.4 The model has a number of similarities to PF2 and is described in further detail in Section II.ii.

The year in review

i Covid-19 pandemic

In April 2020, the Infrastructure and Projects Authority (IPA) issued guidance supporting the continued provision of vital services under PFI projects during the covid-19 pandemic. While the effects of the covid-19 pandemic and measures to restrict its spread continued into 2021, contractors and subcontractors by and large appear to have managed to continue service delivery on projects and have not faced significant financial difficulties. We are not aware of any major disputes of PFI contracts relating to covid-19 and understand that, in most cases, both authorities and contractors have followed the IPA guidance. However, in the face of cost pressures and the withdrawal of government support, there may be an increased need for restructuring.

June 2020 saw the introduction of the Corporate Insolvency and Governance Act 2020, with new insolvency and rescue procedures. Many of these new procedures have not yet been tested in a PPP context. Part of the reason for that are the broad exclusions that limit the impact of certain new provisions on PPP project companies and their funders. For example, in relation to contracts forming part of a PPP or PFI project, companies are not eligible for the new moratorium procedure or the new ipso facto provisions. The latter prevent termination or exercise of other rights set out in contracts for supply of goods and services where the trigger is the customer's entry into insolvency proceedings, which, in other contexts, has given rise to questions around termination and the operation of lenders' acceleration or step-in rights.

ii MIM

The A465 'Heads of the Valleys' Road project is the first PPP to be procured under the Welsh government's MIM. Financial close on the project was achieved in October 2020, just over four months after the announcement of the preferred bidder.

As of June 2021, all new road building projects in Wales have been shelved in an effort to reduce carbon emissions (although this does not affect projects that have already commenced, such as the 'Heads of the Valleys' Road). The Welsh government is conducting a wide-ranging review to determine whether plans to increase road capacity can be justified in light of the climate crisis. In November 2021, the Llanbedr Access Road scheme became the first project to be scrapped as a result of the review.

Other schemes under the Welsh government's MIM include the redevelopment of the Velindre Cancer Centre in Cardiff and the 21st Century Schools and Colleges Programme.

iii Managing PFI contract expiry

During 2021, the IPA has focused on PFI contract expiry. In a report to the House of Commons in March 2021, the Committee of Public Accounts estimated that around 200 PFI contracts will expire in the next 10 years, accelerating from 2025 onwards.5 Expiry presents a significant risk to value for money and continuity of public service.

The PFI Centre of Excellence established a programme of expiry health checks (EHCs) to support PFI contracting authorities in assessing their readiness for expiry. The first phase of the EHCs took place between summer 2020 and spring 2021. In August 2021, the IPA issued 'Managing the Risks of PFI Contract Expiry', a support plan for contracting authorities based on lessons learnt during the EHCs. The IPA offers a structured programme of review, guidance, advice and support for PFI projects within seven years of expiry.6 The IPA proposes to undertake a health check of PFI projects to assess their readiness for expiry and to share knowledge with the private sector counterparties.

iv Discontinuation of LIBOR

In October 2021, the IPA issued an updated guidance note on the impact that the transition from LIBOR to SONIA will have on PFI projects.7 The note includes recommendations for procuring authorities, a specimen authority consent letter and a table of key amendments to financing agreements. Key recommendations include that: authorities should not mandate or direct any changes necessitated by the transition; there should be no refinancing gain resulting for the SPV; and authority consent should not be linked to any other commercial issues or disputes with the SPV.

v UK infrastructure bank

The UK Infrastructure Bank (UKIB), launched in June 2021, currently offers private and public sector financing and is working to establish its advisory services. The government hopes the UKIB will catalyse economic growth, bring geographic balance to UK infrastructure investment and aid the country's drive towards net zero carbon emissions.

Since its launch, the UKIB has made or committed to make several investments including:

  1. a £107 million investment in the South Bank Quay development to service the offshore wind sector;
  2. a £100 million investment to provide high-capacity broadband to hard-to-reach UK premises; and
  3. a commitment to invest £250 million in a private fund seeking to double the amount of subsidy-free solar power in Britain.
vi National Security and Investment Act 2021

The National Security and Investment Act entered into force on 4 January 2022 and overhauled the review of transactions and investments on national security grounds in the UK. The new regime confers on the government a call-in power over a wide range of transactions where it is judged that there may be a risk to national security, and imposes mandatory notification obligations on parties involved in transactions in 17 specified sectors (including defence, energy and transport). The government can exercise the call-in power in relation to transactions that completed on or after 12 November 2020.