PFI has had a bad press, but with its combination of risk put on the private sector, predictable cashflow and growing demand, you could be seeing a lot more of it around
If I had a pound for every time a journalist, politician or City pundit pronounced the imminent demise of the Private Finance Initiative I could probably retire. “MPs say PFI has had its day” was a typical headline in the Guardian after a parliamentary committee gave the process one of its periodic drubbings. But it seems the Treasury itself is ploughing on regardless. And it holds the purse strings.
Under PFI, the private sector funds, provides and owns assets and services for the public in what is effectively a leasing operation.
Although official policy of the previous two administrations, PFI has attracted opprobrium from journalists, back-benchers, and union barons. The incoming
Conservative-led administration had initially appeared to waver in its previous enthusiasm, curtailing Labour’s Building Schools for the Future programme and five PFI prisons. But in recent weeks £2bn of schools spending has been announced, using private investment, and the chancellor George Osborne has been tipped in these pages to announce a “son of PFI” in the autumn spending review.
A senior PFI director of one of the leading infrastructure groups, who had just recently attended a meeting in Whitehall, confided: “The Treasury have told us they are pressing on with PFI, come what may”.
The benefit to the treasury and taxpayer is that if projects go over budget and are delivered late, the private consortium carries the can
The reason for the Treasury’s comparative zeal has less to do with taking debt “off the government balance sheet” - a charge commonly levelled against PFI - than transferring operational and financial risk to the private sector. Critics say PFI represents bad value because of its funding costs: the government can borrow at around half the rate of PFI funders. True, but funders argue that this reflects the risk they have to bear. The benefit to the Treasury - and ultimately the taxpayer - is that if projects go over budget and are delivered months or even years late - as was regularly the case prior to PFI - the private consortium carries the can.
An example of how wrong traditional public projects can go is the Edinburgh Tram project. It was originally costed at £375m and scheduled to enter service in February 2011. This has risen to £770m plus hefty additional interest costs, with a revised completion target of 2014. Last month, Edinburgh’s council voted to stop some two miles short of the city centre, despite months of digging in Princes Street, only to face the threat of withheld funding from the Scottish parliament if the line stopped short.
Far from being on their last legs, public private partnerships (PPP) appear to be gathering pace on the continent and further afield. France has signed the €7.2bn (£6.2bn) extension of the TGV network, led by Vinci. The US has so far only dipped its toes into PPP, but Balfour Beatty - which has helped in its toe-dipping - recently expressed optimism that the country’s crumbling infrastructure would require some element of the approach.
UK participants are now suggesting that there is a renewed interest among lenders to provide debt funding, which had dried up to a large extent during the credit crunch. This suggests they are increasingly comfortable with the relatively predictable nature of each project’s long-term cashflow.
Far from being on its last legs, PPP appears to be gathering pace on the continent and further afield. France has signed the £6.2bn extension of the TGV network
Interest in the “secondary market” - contractors selling on part of their shareholdings in up and running projects - never went away. The market value of PFI equity is expressed in the discount rates that investors apply to the forecast cashflows. The lower the rate, the higher the price they will pay. Rates had fallen from the low teens in the early days of the secondary market to, in some cases pre-crunch, below 5%. They rose to about 7%, but have stopped there. But in Carillion’s results meeting management suggested “the risk is on the downside”.
One reason was growing demand. Pension funds have seen 30-year concession income streams as an ideal match for their long-term commitments to pensioners.
On top of the primary and secondary markets, a “tertiary” market in PFI equity could emerge. It would appear that at least one leading high street bank is planning a “fund of funds” open to retail investors.
Having part of one’s pension invested in PFI schemes may rankle with many a Guardian writer. But with diminishing returns and growing risks surrounding traditional havens for pension funds, some might choose to swallow their principles.
Alastair Stewart is a construction analyst at UniCredit Research