What next for PFI? Part 1

The deadline for the government’s consultation on PFI is coming up and the Treasury Select Committee recently published commentary on recent PFI progress and areas of concern.

Chair of the Treasury Select Committee, Andrew Tyrie MP, said: “At a time when banks are constrained in their ability to fund such projects, it is right we explore other mechanisms of private sector funding, as laid out in the National Infrastructure Plan 2011.

“However, the Government must be cautious about taking on further contingent liabilities or providing guarantees that could lay additional costs at the door of future taxpayers.”

The Local Government Association is currently collecting views from local authorities on PFI for the consultation on its reform announced last December.

Various reports from the government have come up with a variety of suggestions on what might come after the Private Finance Initiative. “One thing that will happen is that the name will change,” commented PFI consultant Edward Yescombe. “An initiative that goes on for twenty years is pretty silly.”

“What everyone agrees on is that private finance is indispensable to public infrastructure”, said Yescombe. The UK has concentrated on the PFI structure where the public sector pays for things but another mechanism favoured around the world is the concession structure, where users pay.

The UK has used this structure sparingly, in projects such as the M6 toll. “The problem with roads is that they’re a universal system, it’s difficult to swap in odd private sector roads when a system is already in place,” said Yescombe.

Another option is that of construction finance, as opposed to long-term finance. The idea behind this is that the construction phase of an infrastructure project, as the most risky, should be privately funded. A switch to public funding should be made upon completion. Issues over maintenance arise though, as it is too easy to leave public buildings unmaintained until they become unmanageable and burdensome.

One of the government’s suggestions to cut PFI costs down was refinancing. But current economic conditions render this impossible. “In 2007 the bank terms were generous for deals and you’re not going to be able to replicate that in today’s market, or maybe even to come because the banks are now aware of the risks,” explained Alan Sadler, director at Local Partnerships.

“If swap rates fall much lower there may be some scope for refinancing,” Sadler added. The government had increased the public sector’s share of refinancing gains to encourage the activity so that for new contracts since October 2008, the authority share would be 50% of gains up to £1 million, 60% between £1 million and £3 million and 70% of any gain above that.

“With the individual refinancing question it is down to the 151 officer to consider the details,” said Sadler. “With the reform of PFI that’s happening, avenues that aren’t there now may be opened up. The Public Accounts Committee recommendations and Treasury response suggested that there may be more flexibility coming in the reform process itself.”

Another suggestion, that of refinancing PFI deals packaged together, has been sidelined, a spokesman for the Committee of Public Accounts told Room 151.

Coming in part two: asset based finance, local business improvement and financial institutions