Out-Law News 2 min. read
08 Jan 2013, 5:15 pm
Edwin Charnaud of Marsh, a global insurance company, said that a key feature of the draft 'PF2' proposals would lead to public authorities becoming more involved in a project's risk management arrangements. Project companies may also be expected to obtain liability insurance for directors appointed from the public sector, leading to an increase in the costs of the project, he said.
"PF2 only applies to new UK infrastructure projects, so it will be a number of years before the full impact of the changes are realised," he said. "In the meantime, private sector providers should be rigorously reviewing their current risk procedures to ensure they can retain their competitive edge when bidding for the UK's next generation of infrastructure development."
Announced last month alongside the Chancellor's Autumn Statement, PF2 is the Government's proposed replacement to the discredited private finance initiative (PFI) scheme. Among other changes, PF2 will see the Government take on the role of a project shareholder holding a maximum stake of 49%. This will allow the public sector to recover a share of the profits made by projects in the same way as private sector investors, but will also mean that it takes on more of the risk of project failure.
Charnaud said that this change would in itself be beneficial for private sector infrastructure project companies. Currently, they are responsible for paying the first 30% of insurance costs which exceed the 'base cost', or the estimated average cost of insurance set at the start of the project. Procuring authorities are responsible for paying the bulk of costs once this limit is breached. According to Marsh, the new arrangements could see this risk-sharing threshold reduced from 30% to just 5% of the base cost.
"While this lower premium risk-sharing trigger level is welcome, it could increase the frequency of sharing arrangements during the life of the project, adding to contractors' administrative burdens," Charnaud said.
"As it is envisaged that public sector investors will appoint directors to the boards of project companies, it is also likely that these directors may seek the protection of directors' and officers' liability insurance, adding to the costs of the project. Additionally, now that the government has the option to act as a minority co-investor in projects, it may seek a greater say over a project's insurance arrangements," he said.
Infrastructure law expert Jonathan Hart of Pinsent Masons, the law firm behind Out-Law.com, said that PF2 as proposed could lead to greater transparency and public sector participation in infrastructure projects. Other features of the new model include the introduction of an 18 month time limit for negotiating projects, while project operators will have to set out profits and revenue in the form of an annual statement.
"Marsh's comments highlight a specific aspect of the PF2 model," Hart said. "The new model launched by the Treasury addresses squarely some of the previous criticisms of the lack of transparency in PFI, and provides for greater public sector participation. However, transparency and participation come at a price – in this case, the potential for increased costs associated with insurance management."
