What next for PFI? Part 2

With the deadline for the government’s PFI consultation set for next week we take a look at its possible successors. This week, part two: asset based finance, local business improvement and financial institutions.

A number of the ideas being examined to help finance future infrastructure are borrowed from other countries. Tax Incremental Financing, the concept of borrowing against future Council Tax income, was initially developed in the US.

The Canadian concept of Business Improvement Districts (BIDs) has been embraced in Scotland, which first passed BID legislation twelve years ago.

In a BID, a set of businesses local to an area pay an investment levy which is used to improve the area. “You can use the investment levy for basically anything that the businesses want as long as it isn’t a statutory requirement of a statutory authority,” explained Ian Porter Davison, director of BID Scotland. “We’re doing whatever the issues are that concern the business, so it tends to be around parking, access, safety and security and cleanliness.”

There are currently a number of BIDs in the UK. Legislation allows for a five-year period for each BID, after which a new BID business plan must be put to a new vote. The Coventry BID for example runs from 2008-2013 and applies to the town centre, delineated by the ring road. Coventry Council works with businesses to keep the town centre competitive in the face of stiff competition from other areas in the region.

Asset-based finance is another alternative being discussed, according to PFI consultant Edward Yescombe. It is used in the case of water, where a regulated, private industry exists.

Borrowing can be made against the future cashflow of the industry. “Because you’re borrowing against cashflow it makes water infrastructure, although it is privately funded, cheaper than PFI funding,” said Yescombe. “There is work being done in the Treasury on how it might be extended.”

What the Treasury does not seem to be looking at is the idea of the financial institution ‘take-out’ against construction. In property financing bank funding is used for the construction, and a financial institution such as a life or pensions company buys bonds with an agreement to convert them into a (pre-priced) installment loan repayable over a specified period.

“It can be translated to PFI and the advantage is it provides attractive long term funding whilst doing away with excess equity profits,” said Yescombe. It seems an obvious model but it doesn’t seem to have been publically mentioned by the Treasury.”

On announcing the review of PFI last November the Prime Minister called for a larger role to be played by pension funds.

The government’s consultation on the Private Finance Initiative closes next Friday, February 10. One source told Room 151: “It seems the Treasury must have a plan in place for the budget statement. Unless they know what they are going to do before the consultation even closes, that seems unlikely.”