Out-Law Analysis | 09 Nov 2018 | 5:29 pm | 3 min. read
In his recent budget speech, UK chancellor Philip Hammond sounded the death knell for PFI and its successor, PF2. However, at the same time as he killed off the most well-known private finance model, the chancellor stressed that half of the UK's infrastructure pipeline would be built and financed by the private sector. He remains "committed to the use of public-private partnership where it delivers value for the taxpayer" and where it "genuinely transfers risk to the private sector".
While the heyday of the PFI model in the UK is long over, it use, in its latest PF2 incarnation, had, until the budget announcement, still been on the cards for around £3bn of projects. These included the £1.3bn A303 tunnel under Stonehenge, for which a development consent order was submitted last month; the approach roads to the £1.5bn Lower Thames Crossing Tunnel in east London; the new £170 million Glen Parva prison; and primary care estates within the NHS. Other big projects in the pipeline where PF2 could have been a funding model include the £3.5bn Oxford-Cambridge Expressway and the £6bn TransPennine Tunnel.
A Treasury spokesperson has confirmed that the A303 and the Lower Thames Crossing Tunnel projects will still go ahead, but will be funded "by other means". Long-term capital spending decisions in other sectors, including health, will be taken at the Spending Review in 2019, where the business case for each project will be scrutinised.
So what structure might future involvement of private investment in public infrastructure follow?
The demise of the PFI model leaves a big gap, and it will be interesting to see to what extent alternative private investment models will be used to fill the void. One solution may not fit all, and different sectors may opt for different approaches or indeed different projects within a sector may be procured differently.
The government's published 2018 budget documents state that it will continue to support private investment in infrastructure through a range of tools. It gives special mention to contracts for difference (CfDs), the UK Guarantee Scheme (UKGS) and the Regulated Asset Base (RAB) model.
It does not appear that CfDs or the UKGS would be able to fill the gap left by ending PFI/PF2. The CfD regime is used to support privately-owned energy projects by providing for a fixed price for energy generated by that project. It is not obvious how it could be extended to projects unrelated to energy. The UKGS is a government-backed guarantee to help infrastructure projects access debt finance where they have been unable to raise finance in the financial markets. However, UKGS will only support existing financing, and is not a model that can replace a debt or equity financing of infrastructure.
There may be more room for a development of the RAB model to fill the gap. This is a commonly-used model across the regulated utility sector, which has recently been used in large-scale infrastructure schemes such as the Thames Tideway Tunnel. In essence, the RAB model gives a commitment that the regulated company's investment will be recovered over time from consumers. This makes investments in regulated utility companies relatively low risk, and decreases the cost of finance compared to PFI/PF2.
It may be that we will now see further consideration as to how components of the model will be used in new sectors. Use of RAB-type structures has already been contemplated in the context of operational road projects. Nevertheless, issues on how one makes the end user pay and the difficulties of financing greenfield projects cannot be overlooked.
As well as the mechanisms highlighted in the budget documents, there are other 'sons of PFI'-type structures currently in use in the UK that have been sufficiently developed in their own right, and are anticipated to survive the end of PFI/PF2. These include the Scottish Hub Programme and the Mutual Investment Model (MIM).
The Scottish Hub Programme uses hub companies which are made up of public sector bodies alongside a private development partner. Local authorities submit a 'project request' to these joint ventures, which assess whether the project can be procured through the programme. The profits of the private sector are capped. This model has mainly been used to finance social infrastructure projects.
The recently-launched MIM could be seen as the Welsh equivalent of the Hub programme. The MIM model aims to introduce equity from long-term investors and to reduce the potential of a windfall gain on the secondary market. It will be interesting to see whether the end of PFI/PF2 results in the emergence of an English version of Hub/MIM.
Other sectors have successfully developed their own private finance-type models, which bear some hallmarks of PFI but have long since become sufficiently distinct in their own right. These sectors include student accommodation and social housing, in which new infrastructure is being delivered by the private sector in substantial qualities. The end of PFI could ultimately result in attention being paid to the development of sector-specific models in other areas, such as health and education.
The models set out above tend to target the creation of funding streams for projects or companies which in turn render the asset, project or business financeable or bankable. There is generally no current shortage of finance in the market for well-structured projects. Where there is, structures such as the UKGS can still be used to support financing for projects.
John Woolley and Sandra Graham are projects experts at Pinsent Masons, the law firm behind Out-Law.com.