Out-Law News 3 min. read
04 Mar 2013, 3:27 pm
Jonathan Hart of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the Government announced that the public sector would finance the estimated £1 billion cost of providing a new fleet of trains and maintenance facilities on the cross-London line. The change, which was proposed by the Mayor of London, will help "ensure services can open as scheduled in late 2018", Transport for London (TfL) said.
The previous proposal would have seen the public sector contribute £350 million to the cost of the fleet, with the remainder due to be provided through a private finance initiative (PFI) arrangement. Private sector bidders would have been entitled to apply for the Government's new UK Guarantees scheme, which was designed to drive down the cost of finance for projects otherwise struggling to obtain funding.
"This latest announcement is further evidence, if any were needed, of the continuing effects of the parlous state of the project finance lending market," Hart said. "The decision by the procurers of the rolling stock to revert to a capital funding solution illustrates a lack of confidence in bidders being able to secure sufficient support from external funders to the project - or at least to secure a project close within a meaningful time scale – despite the Government's commitment of up to £500m through the infrastructure guarantee scheme."
"Time is money; and in this case the concern of a repetition of the extended Thameslink procurement may well have been decisive in the switch from a PFI solution. It remains to be seen how this squares away from a procurement law perspective and also whether, ultimately, the lack of active long-term equity participation is necessarily going to deliver the best outcomes for the project," he said.
Crossrail, which will run between Heathrow and Canary Wharf via new tunnels under Central London, is due to open in 2018. It will be operated by Crossrail Ltd, a wholly-owned subsidiary of TfL, and is jointly sponsored by TfL and the Department for Transport (DfT). The original tender was for the design, manufacture, finance and servicing of around 60 new trains for the route and the construction of a new deport at Old Oak Common in west London. The new trains are due to operate on the existing UK rail network from May 2017 before being put into service on the Crossrail route.
In a statement to Parliament, transport minister Stephen Hammond said that a simplified procurement process reflected the "complex and unique" circumstances of the project and did not affect the Government's commitment to the use of private finance in transport projects where appropriate.
"Trains need to be ordered by the middle of 2014, so that testing and delivery of the fleet can start in spring 2017, well ahead of the opening of Crossrail's Central Tunnel Section in late 2018," Hammond said. "Any delay in the rolling stock order would place this delivery timetable in jeopardy. By removing the private financing requirement and moving to a wholly publicly funded procurement the contract negotiations will be simplified and as a result Transport for London believes this will provide greater certainty that the contract can be awarded in time."
Other contract requirements, including the need for bidders to set out an estimate of the contract value that would be spend in the UK, would remain the same, Hammond said. Crossrail Ltd would issue revised terms to bidders shortly, he said.
Infrastructure law expert Jonathan Hart said that until there was more certainty around the Government's plans for the future of private financing, funding of major projects would likely remain limited. The Government outlined plans for its replacement to PFI, dubbed 'PF2', in December. The new scheme will see the public sector take on the role of a shareholder in a project, enabling it to recover a share of the profits in the same way as private sector investors. Institutional investors, such as pension funds, will also be encouraged to take a stake in projects.
"Until new means are put in place to secure debt from other institutional funding sources - and there is ongoing consideration in the market place of what the new PF2 solution means in this regard – options for Government as to how such major transactions are going to be structured will remain restricted to full capital funding from taxpayers or the project financed solutions involving the limited numbers of banks in the market which are still providing long-term debt," he said. "This announcement highlights the few choices which are available."
