November 1, 2018

The end of private finance investments for public infrastructure as we know it

In his budget speech, delivered on 29 October 2018, the Chancellor announced that the Private Finance Initiative (PFI) and Private Finance 2 (PF2) will not be used for the future delivery of privately financed infrastructure projects.

PFI was introduced in the 1990s and the following years saw a strong pipeline of projects coming to the UK market across a broad spectrum of sectors.  However, during the 2000's the pipeline of projects began to tail off naturally and criticisms of the model increased, both within the media and politically.  In November 2011, the Treasury announced it was to review PFI with a view to finding an alternative model which would be cheaper, have a wider range of funding sources, strike a better balance of public/private sector risk, provide greater flexibility, be quicker and cheaper to procure and which would provide a greater level of financial transparency.  In December 2012, a new approach to PFI was introduced, known as PF2.  Despite the reforms which PF2 sought to achieve, PF2 has only been used six times since its introduction and both PFI and PF2 have continued to be criticised for their inflexibility, including in a Public Accounts Committee report which was published in June this year.  Additionally, the liquidation of Carillion at the start of the year put PFI projects firmly in the spotlight, given the company's significant involvement in the PFI market and their underlying portfolio.

The Chancellor, in his budget speech, said that he had "never signed off a PFI contract as Chancellor…and I can confirm today that I never will.  I can announce that the Government will abolish the use of PFI and PF2 for future projects."

A number of projects (including the A303/Stonehenge and Lower Thames Crossing roads projects and new prison projects, such as Glen Parva prison) were potentially due to be delivered by PF2 and so the Chancellor's announcement may have come as a surprise to the industry.  However, in his speech, the Chancellor stated that "Half of the UK's £600billion infrastructure pipeline will be built and financed by the private sector and in financing public infrastructure I remain committed to the use of public-private partnership where it delivers value for the taxpayer".  Additionally, the Government's published 2018 budget brief sets out that private investment in infrastructure will continue to be supported by the Government through other means such as Contracts for Difference, the Regulated Asset Base Model and the UK Guarantee Scheme.  It is therefore clear that the UK will continue to have a market for private sector investment in infrastructure, indeed the infrastructure required cannot be delivered without input from the private sector.  However, what remains to be seen for future projects is details of what model(s) will be used and, critically, when the projects will come to market - as frequently reported, certainty of project pipeline is required by the industry (for investors, construction companies and service provides alike).

And what does the announcement mean for the UK's existing PFI/PF2 projects, of which there are approximately 700? The Chancellor (and the published budget brief) are clear, the existing PFI and PF2 projects will not end.  This is predominantly due to the fact that voluntarily terminating such contracts rarely provides value for money due to the compensation costs which need to be paid out pursuant to the underlying contracts -previous estimates have put the cost of voluntarily terminating existing PFI projects at approximately £51bn.  Additionally, the early PFI projects do not contain voluntary termination provisions which the public sector can call upon. 

In relation to the existing projects, a new "Centre of Best Practice" was announced during the budget and this will be piloted in the Department of Health and Social Care, alongside a continued push by the Government to enhance value for money in existing PFI contracts and the Government's current contract management training being undertaken in the public sector. 

There are couple of initial points to note here.  Firstly, the details of the "Centre of Best Practice" are yet to be set out and it therefore remains to be seen what format this will take, for example will it be merely guidance, or compulsory.  The Government has previously published guidance and codes which sought to make savings in operational projects - see "Making Savings in Operational PFI Contracts" (published in July 2011) and the "Code of conduct for operational PFI/PPP contracts" (published in June 2013).  Will the "Centre of Best Practice" build on the principles set out in those previous documents or will it introduce new elements?

Secondly, the "Centre of Best Practice" will be piloted in the Department of Health and Social Care, which does have the highest combined capital value of existing PFI/PF2 projects but at what stage will this be rolled out to other departments with existing PFI/PF2 projects? The education, transport, defence departments also have high capital value PFI portfolios and there are numerous other departments with PFI portfolios.

Thirdly, will the "Centre of Best Practice" place any additional requirements or commitments on the private sector on existing PFI projects and will these be compulsory or voluntary?

It is evident that existing PFI/PF2 projects will continue to come under scrutiny for the remainder of their project terms.  The debate as to the value of existing PFI/PF2 projects shall therefore continue for at least another 20 years or so given that the last unitary charge payable under the existing projects is estimated to be payable in the late 2040's.

At this point in time, the private sector needs to continue delivering under their existing projects and await the details for future projects and the model(s) which will be utilised for their delivery. One thing is clear, the Government will continue to need the private sector to finance and deliver major infrastructure projects – they cannot do it without the private sector's involvement.