Despite apparently being on its last legs, the Private Finance Initiative is not looking in bad shape. The coalition government is committed to investing in infrastructure and is seeking more private sector investment, including increased lending by banks. Contrary to Tim Care’s earlier blog, PFI looks set for another year of growth in 2011.
The £6.2bn PFI project to widen the M25 closed in May 2009 at a time when the initiative had hit rock bottom with the lowest number of deals closed since this type of project finance took off in the late 1980s and early 1990s. But, despite this year’s change in government and a new chancellor known to be at best lukewarm about PFI, 2010 has seen a rise in the number of deals closed.
These include significant ones, such as Birmingham’s £2.7bn highways maintenance project, Staffordshire’s £1bn waste management project and the Belmarsh Prison PFI at £415m. Next year we should see deals worth more money, including Sheffield’s highways PFI, the South London Waste Partnership and the second phase of the Nottingham Express Transit.
Yes, PFI credits have been revoked in a number of projects and some schemes have been scrapped. But public bodies have statutory duties to provide services and, with reduced budgets and no ring-fenced funds, they will have to look at alternative ways of raising cash to satisfy their obligations. PFI has come under criticism for being poor value for money and an expensive procurement model but it looks likely to continue to help fill the gap – albeit with some tweaks.
Value for money will rise up the agenda. With less money, public bodies will have to make what they have go further. To bring down costs they will need to examine how much of the risk they can afford to ask their PFI partners to continue to take. Almost certainly, we will see a shift in risk allocation with the party best able to manage the risk actually taking it. And there may be a role for PFI rebates following the campaign by the MP Jesse Norman.
It also seems likely the public sector will have to raise more of its own funding to procure infrastructure and services. We will see a number of different models including the use of regulatory assets – a number of central and local government bodies have substantial assets they can use to raise funds. Tax Increment Financing will have a role to play and there may be increased prudential borrowing.
The public sector will, however, need to consider carefully the funding model it uses in order to maintain the 'off balance' sheet status of the deals it enters into. Private equity will also play a greater role next year. Will the bond market make a comeback? Quite possibly.
Far from hanging on by its fingertips, PFI (or PFI mark 2) is set for resurgence in 2011. With the state of the public finances and public services as they are, the coalition cannot afford it any other way.
Shapna Roy is head of projects at law firm Wedlake Bell
