Many readers will have seen the Channel 4 documentary Dispatches on 14 August, which was the latest in a spate of media attacks on the private finance initiative.
The programme was depressing, not just because of its unbalanced and generally unfair slurs on the construction industry, but also because of the alarming level of apparent ignorance as to the principles of the PFI.
Among a range of criticisms that were superficially presented and not properly interrogated, foremost was the complaint that the private sector has benefited from windfall profits through the refinancing of deals after construction.
Let’s reflect on a number of matters that surround refinancing. First, no breach of any statutory or contractual obligation occurs when PFI project companies refinance (that is, sell on their equity). Indeed, one might argue that the fiduciary duties of the directors of those companies oblige them to improve returns to their shareholders through such restructuring. This is the basis of a free market, capitalist economy.
Second, such refinancing reflects the fact that the early, construction phases of a PFI project are inherently more risky and this attracts a premium within the financial structure of the deal. When construction is complete and the risk dissolves, any unspent premium is the reward gained by the PFI company’s shareholders for the risks taken.
While the public sector bemoans the fact that it may not always receive the lion’s share of any refinancing gain, to my knowledge it has never shown a reciprocal willingness to meet the liabilities PFI companies face when they fail. One need look no further than the recent problems of Jarvis to witness this.
Third, the right to refinance and the basis upon which any gain will be shared is embodied in the PFI project agreement. The public sector, advised by professional firms, is in no better or worse a bargaining position when striking a deal than the private sector.
Fundamentally, PFI is an invention of the public sector to satisfy a dire need to invest in public infrastructure. The private sector did not create PFI nor is it responsible for the public sector’s desire to transfer construction risk to it. The alternative is simply for the public sector to retain the risk of time and cost overruns. As they say: “You pays your money and you takes your choice.”
Nick Gray, director and head of PFI advisory services, Faithful + Gould, Stockton-on-Tees
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