Let us first look at it from the major contractors’ viewpoint. There is undoubtedly a lull in the number of big projects approaching financial close, at least when compared with the frenetic activity of last year.
However, Amec, Balfour Beatty and Building and Property Group are still battling to reach financial close on the most difficult hospital project yet seen – University College, London; Tarmac has three significant projects – GCHQ, Swindon Hospital and Onley Prison; and Bovis will be hoping that the Treasury building reaches financial close before the millennium. So, there are some important projects about to go on site.
But we should view this slowdown as a good thing because it frees up the resources we need for the huge array of education, health, transport, accommodation and defence mega-projects coming forward, such as the Inland Revenue’s outsourcing programme and the £7bn London Underground overhaul.
In addition, this breathing space will enable us to fully appreciate the work of the Treasury taskforce in preparing standard contract terms, and to become comfortable with the concepts of market value compensation and uninsurability risk. At a recent meeting between the British Banker’s Association and the taskforce, there were encouraging signs that the fine detail of the terms can be drafted in a way that may be more acceptable to sponsors and lenders than the bare bones we’ve seen so far.
Contractors will, I am sure, welcome the competition that is developing in the market. Until recently, it appeared that the expertise built up by the likes of Amec, Balfour, Tarmac, Laing and the two McAlpines would let them dominate the market. We are now seeing a healthier atmosphere – particularly in education and second-tranche hospitals – where experience counts for little but attitude to human resources matters.
One message from recent prequalifications is buyers want reassurance that they are not climbing into a tank of piranhas
Also, the fact that the second-wave West Middlesex Hospital shortlist includes only one UK contractor is a sign of the internationalisation of the PFI. Surely it indicates that the European Procurement Directive really works, so it can only be a matter of time before we see Morrison or Taylor Woodrow on the shortlist for the first PFI hospital in Reggio Calabria.
Competition is just as fierce in the funding market as more institutions enter the arena. Senior debt margins and maturities have gone down and out respectively, to the point where the competitive position vis à vis bond financing is largely the function of gilt/LIBOR spread at the point the transaction is completed. We look forward to welcoming Bradford and Bingley Bank into the PFI funding community – no doubt offering 40-year maturities on 30-year concessions.
The recent history of PFI has seen the development of a funding approach based on the premiss that project finance is a commodity. The taskforce’s intentions for the government offices on Great George Street appear to be based on the misapprehension that once the commercial terms are tied up with Bovis and Stanhope – without reference to funders – the financing will be subject to an independent competition.
However, it seems to me that the PFI market is now beginning to move back towards the development of real partnerships. One of the messages coming from the recent round of prequalifications is that public sector buyers are looking for reassurance that they are not climbing into the tank with piranhas, so the “soft” attributes of the bidding consortia, such as their approach to partnership and staff management, are important.
It may be wishful thinking on my part, but I perceive similar influences in the creation of the bidding groups. In future, the successful bidders will be those that approach each project as a genuine partnership rather than just a transaction. As part of that shift, we should see bidders selecting banks on their relationship and track record, rather than choosing Loans R Us plc and then spending more money on legal fees than they saved by getting a five-point reduction on the margin.
Jeff Thornton is head of public sector finance at the Royal Bank of Scotland.