Adrian Montague, chief executive of the Treasury's PFI taskforce, is preparing to set up a "Government Investment Bank" to lend to PFI contractors (8 January, page 9). This radical plan, which would see the PFI scrapped in its present form, is being strongly resisted by the major contractors and their bankers.
Because high-earning bankers are interested only if their fees have five or six noughts on the end, they want big deals at high interest rates. As Mansell and Lovell have recently found to their cost, being "small" means being irrelevant to the City.
But, unfortunately for the City slickers, in the rough-and-tumble world of construction the irrelevant smaller contracts account for about 75% of the market. Most public sector projects that the Treasury would like the private sector to finance fall within that 75% market share.
Now, I am sure that smaller contractors are terribly sympathetic to the majors' desperate plight over the threatened demise of the PFI. Having worked so hard with the bankers to exclude anything that might be within the range of most smaller contractors, including insisting on the bundling of traditional smaller contracts, it is, of course, outrageous that the Treasury should consider welshing on the deal.
Although there won't be many tears shed by smaller contractors if the government cuts bankers out of the PFI equation, we, like the majors, don't want to be thrown out with the bath water. The whole industry wants to participate in the PFI, smaller contractors more than the majors, but we must all be given the opportunity to do so under equitable terms.
In 1994, soon after the PFI emerged, my own company enthusiastically tendered for a £3m-4m ambulance station, in partnership with a self-financing local property investor who would have added it to his portfolio. It was a design, construct, service and maintain deal. It failed to proceed beyond tender stage, but at least we understood the risks and benefits, and it wasn't too expensive to price.
Since then, we have been prevented from entering the PFI market, not just because the emphasis switched to major projects, but because the terms of the PFI contract are way over the top of the "very onerous" scale.
To date, there has been far too much emphasis on overcomplicated and expensive tendering procedures; excessive risk and blame transfer to the private sector; heavy-handed, one-sided security conditions for government; and unnecessary government interference in the detail.
Brokers, dealers and bankers involved with the PFI were solely concerned with how much they would make out of the deals
There is an enormous reservoir of goodwill from smaller contractors, as well as untapped finance from smaller trusts and pension funds outside the Square Mile. If the government wants to use these smaller but perfectly respectable sources of finance, management and construction, PFI schemes will have to be made more attractive to smaller enterprises. That will mean:
- more secure long-term rates of return, including retention of ownership at the end of the initial term
- no trap-door penalties where the whole of the investment can be confiscated by the government because of some administrative or management error
- better security for investors, with simpler and more established procedures for buying and selling schemes
- more equitable and less adversarial contract terms reflecting both the Latham and Egan partnership philosophies
- no superfluous, overpaid hangers-on
- separating operation from construction.
Colin Harding is chairman of Bournemouth-based contractor George & Harding.