Out-Law News 2 min. read

Budget 2018: UK private finance changes must not derail current projects

Changes to the way private sector investment is used for public infrastructure projects in the UK must not delay essential existing and planned projects, an expert has warned.

UK chancellor Philip Hammond announced that the government would abolish the use of PFI and its successor, PF2, for new public sector infrastructure projects. The government intends to "honour existing contracts", but intends to play a more active role in their management, beginning in the healthcare sector, he said.

Private finance expert Jonathan Hart of Pinsent Masons, the law firm behind Out-Law.com, said that it remained to be seen whether this would mean "a total halt to future project finance investments, or else the further evolution of models".

"The key thing is to make sure that changes coming from this announcement do not represent a further delay to projects already in the pipeline and the delivery of future, much needed infrastructure," he said.

In his Budget speech Hammond said: "I remain committed to the use of public-private partnership, where it delivers value for the taxpayer and genuinely transfers risk to the public sector – but there is compelling evidence that the private finance initiative does neither"/

A new 'centre of best practice' will be established within the Department of Health and Social Care (DHSC) to "improve the management of existing PFI contracts", according to the Budget document.

PFI was introduced in the early 1990s as a way of using private sector skills and finance to deliver public services. Under a PFI contract, the private sector obtains finance to design, build and operate a facility for the benefit of the public, in return for which the public sector pays a monthly fee for its use and management over the project's 20 or 25 year lifespan.

PF2 was introduced in 2013 to replace the PFI regime, and effectively allowed the public sector partner to take on the role of a minority shareholder in a privately-financed public infrastructure project. However, neither funding model has been used by the government since 2016.

Hart said that the chancellor's comments pointed to "a potential headache for those spending departments which either are actively using project finance solutions for new projects, or considering this as a means of procurement", including the transport, justice and defence departments.

"There's some irony here given the present liquidity in the lending market and the active pursuit of institutional investors, including pension funds, for projects, given the relatively limited market for assets to invest in. A further irony, too, demonstrated by the administration of Carillion is quite how tough the risks associated with these kinds of projects can be. If the goal has been to score a political headline by trumping current Labour Party policy, then this can be seen as a success. However, it misses the valuable contribution that private finance has played, does play and can continue to play in the delivery of infrastructure. And it raises some questions as to what the future might look like for private investments," he said.

"We have been here before. The first SNP government in Scotland 'abolished PFI' but ultimately replaced this with its own invention, the 'not for profit' model, which has been in successful use for the best part of a decade. This has recently been followed by the Welsh government's own 'mutual investment model'. As mega-projects like Thames Tideway have shown, project finance can also be brought into play in the delivery of regulated utilities - using a different approach and procurement method to that adopted for PFI and PF", but nonetheless harnessing the power of private investments," he said.

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