PF2: plus ca change
The Treasury’s review of the Private Finance Initiative was aimed at finding a “new approach to delivery” that is “less expensive, and that uses private sector innovation to deliver services more cost effectively”.
As such the new approach unveiled in the Chancellor’s Autumn Statement is underwhelming. As Richard Abadie, PwC’s global head of infrastructure, put it:
“The new PF2 model appears similar to the alleged “discredited” PFI model. Besides the change in name, the core of the model i.e. using private finance to finance construction and getting repaid over a long period of time, remains the same and will be welcomed by local and international contractors, investors and lenders.”
With a spread of around 7 per cent between the weighted average cost of capital for a PFI project of around 9 per cent and a long term gilt rate of around 2 per cent, the use of private finance remains very much the expensive option for the UK taxpayer.
The government has shown that is alive to problems of PFI, particularly the widespread concerns around the shortage of affordable financing, the prospects of excessive profit making, the ludicrous examples of inflexibility that formed part of many previous projects and the lack of clarity and transparency around the funding and liabilities.
The new proposals aim to tackle this in a number of ways, all of which fall somewhat short.
First, investment is to be put on a more solid footing by reducing reliance on debt-financing through banks through a greater contribution from long term investors such as pension funds.
But there is no mention of how this is to be achieved, other than through the increase in the equity share of PF2 financing. While this may entice some pension funds to invest, this remains pure guess work. Evidence suggests that pension funds were reluctant to back the government’s infrastructure plans in last year’s Autumn Statement. What’s more, there is no reason to suggest the long term investors will be expecting much lower rates of return, at least in the short run. Why would they?
In fact, the new debt to equity structure is likely to increase capital costs, as Mark Hellowell of the University of Edinburgh explains here. Extra cost, of course, which will passed on to the taxpayer. So much for less expensive.
Second, the taxpayer will buy into each PF2 scheme as the public sector takes a minority share, enabling the government to share in rewards, off-setting some of the cost and getting greater alignment between public and private partners in the project.
The extent of this holding is not made clear as no actual figures are attached to it. With austerity set to continue well beyond 2015, it will be difficult to see public authorities affording to obtain the 49% shares that have been suggested in the press. More likely this will be about token shares that allow a seat on the board of the PF2 company. While this in itself is a positive step, any claims of public sector buy-in and reward sharing should be tempered.
At the same time, the Chancellor has made no moves to stop the trading of PF2 shares on secondary markets. While this trading continues, board membership won’t be enough to stop PF2 investors potentially making “excessive profits at the expense of the taxpayer”, to use the words of the Public Accounts Committee.
Third, soft services such as cleaning and catering are to be removed from PF2 contracts. This, of course, releases large parts of the workforce from the PFI regime and, in theory, provides greater flexibility for public sector bodies to seek alternative forms of delivering those services, including the in-sourcing of services.
Fourth, new proposals on transparency are welcome. While much of the information on liabilities is currently available, an annual report from the Treasury will be help shine more light on the figures. More interesting will be the reporting on returns required for all PF2 investors. There’s plenty of ways to spin those figures but it might make for some interesting reading (between the lines at least!).