The public-private body that will provide money and advice for PFI projects has been unveiled – to a chorus of scepticism on its ability to reconcile private profit with the public good.
Nervousness, scepticism and downright confusion were the overwhelming reactions to the Treasury’s announcement last week that it is to create a public-private body to advise on the private finance initiative.

These reactions were tempered by statements of qualified approval for the new body, to be called Partnerships UK, but for each one, there were many more questions on how it will work.

Officials seem almost as confused. At a briefing on the new body, they insisted, on the one hand, that it would be mainly a project manager, but on the other revealed that it would build up £1bn of equity stakes in, and debt funding to, PFI projects.

They said Partnerships UK, which will be 51% owned by the private sector and 49% by the public sector, is meant to help the government secure the best terms possible for projects. But they also conceded that its private sector investors would want the best return from their equity stake.

And they admitted that advice to public sector clients had to improve, even though they accepted that the people giving that advice at the moment – the members of the Treasury’s PFI taskforce – would form the core of Partnerships UK. Many in the private sector perceive this group as unhelpful and underqualified, and would like to see it disappear altogether.

As well as advising public sector clients, Partnerships UK will provide them with funding to get their projects off the ground and, having done so, will convert this funding into equity stakes in the projects.

The government will provide £20m to get Partnerships UK up and running – next spring is the target date – and £100m in loan guarantees. This will be used to leverage in up to £1bn from private funders.

Last-minute briefings, and even a change of name from UK Capital, were designed to give Partnerships UK a better image than the concept of a PFI bank, which has raised outright hostility from the private sector in recent months.

This body won’t be allowed to do what it likes, because of the public sector stake, but private sector people’s careers will be riding on it Gareth Craig, CCF Charterhouse

Gareth Craig, CCF Charterhouse

What is it? And who would use it?

But bankers were still sceptical as they analysed Partnerships UK. Gareth Craig, a director in CCF Charterhouse’s PFI department, said: “What seems to have been happening is an effort to make the vehicle more user friendly. Hence the decision to insist that this is not a ‘bank’, and to use the New Labour term ‘partnership’, but what has changed in the substance? “The ability to invest equity is still there and the £1bn capital base is still around. And there are so many other unanswered questions.

“This body won’t be allowed to do what it likes, because of the public sector stake, but private sector people’s careers will be riding on its investments being a success. How do they give impartial advice to their public sector clients while satisfying private shareholders?” Craig also queried whether departments such as the Ministry of Defence, which has built up a good reputation as a PFI procurer, will even want to use Partnerships UK’s services.

Anthony Rabin, managing director of Balfour Beatty’s capital projects arm, welcomed anything that would improve public sector procurement. However, he had some doubts over whether Partnerships UK’s help would be suitable on some projects.

Officials say the plan is that, say, a large metropolitan authority with limited cash and a small in-house engineering department would go to Partnerships UK for advice and funding in return for a stake. But Rabin said: “Does this seed corn money they are providing mean that the public sector will be borrowing at a higher rate than it normally would in the PFI process? There’s always a danger in providing start-up money for projects that might not succeed otherwise.” Jarvis Projects managing director Pat Gardiner sees the situation from another angle. He says the public sector too often tries to wring “punitive” terms out of the private sector, and that Partnerships UK’s own interest in projects might mean it negotiates less aggressively on behalf of its public sector clients.

Like Rabin, Gardiner is desperate to see an improvement in public sector procurement. Jarvis was recently held up for months when trying to close its Leeds Cardinal Heenan PFI school deal by the lack of a “straightforward” letter from the Department for Education and Employment.

“We talk about the divide between the public and private sector, and to some extent that may be a prejudice. But in many prejudices there is at least some truth, and quality of advice and guidance available to the public sector has to be improved,” he said.

We can all see the potential for conflicts of interest in this idea, and how it will be done is very problematic. There is a lot of work to be done

A PFI banker

Even as Partnerships UK is set up, worrying new signs of poor procurement are emerging among public sector clients. Consortia have been asked to provide initial project submissions on some new PFI deals. These will involve up to 12 consortia devoting 10-12 people to an intensive three-week exercise to provide early ideas for a project.

Can it cut consortia’s bidding costs?

PFI professionals do not come cheap and this onerous new task is an added burden on contractors simply trying to get from a shortlist of 12 to six.

Contractors will expect Partnerships UK to tackle these problems. The Major Contractors Group calls Partnerships UK a “creative solution” to the need for better advice, and the parties that seem to be most under threat by its creation are existing advisers.

Accountants such as KPMG and PricewaterhouseCoopers have been among the biggest beneficiaries of the PFI process, to the extent that their huge fees have been criticised by the National Audit Office.

Gleeds head of PFI Jonathan Stewart says his firm will relish the competition from Partnerships UK – and he may be right, given that his firm can offer specialist construction advice. But he also has concerns, the biggest being that while a group of bankers and government officials draws up a steering plan for Partnerships UK, there will be a hiatus in current PFI negotiations.

Partnerships UK: the key facts so far

What is it? A body that will be 51% owned by the private sector and 49% by the public sector. It will advise the public sector on the procurement of PFI projects. So, is it just a project manager? No. It can either charge a fee for its services or take a stake in projects it advises on. In time, it is expected to invest £1bn in PFI projects through these equity stakes and through loans made by its private sector investors. Will contractors still be able to arrange their own funding for PFI projects? Yes. Why should public sector clients use it? The argument is that it will provide the best possible advice, drawing on the expertise of a team that has worked within the Treasury for two years. Why is it being set up? Chancellor Gordon Brown asked London Transport chairman Sir Malcolm Bates to review arrangements for the procurement of PFI projects last November. Partnerships UK is his idea. Why not just continue with the existing Treasury PFI taskforce? Officials are worried that as taskforce members’ contracts run out, they will be lured to other organisations and the quality of advice provided by the taskforce will drop. Partnerships UK will be a souped-up alternative. Who will be in charge of Partnerships UK? No one knows yet. Treasury PFI taskforce head Adrian Montague is front-runner. But he wanted more investment powers for the new body and may decide to return to full-scale investment banking. What happens next? A steering group will be set up to work on a business plan. It will be chaired by senior Treasury official Steve Robson and will include representatives of the Royal Bank of Scotland, Barclays, Prudential, Halifax and Abbey National and the European Investment Bank. When will it be set up? Not before March 2000.