05 May 2006
Investors in Private Finance Initiative projects face only a 'relatively benign' risk of expensive construction overruns or payment penalties, credit rating agency Standard & Poor's has stated.
The analysis by S&P, whose ratings are used by investors as a guide in assessing risk, raises questions about whether the public sector has driven a sufficiently hard bargain when negotiating PFI deals and transferring risks.
The S&P report, 2006 global credit survey, explains that 'the relatively benign nature of [Public-Private Partnership] asset construction has resulted in only a small number of… projects encountering delays and overruns severe enough to cause the entire project to default.'
Jonathan Manley, head of PPPs at S&P and co-author of the report, told Public Finance that the analysis was good news from a debt funder's or investor's perspective.
'But it does raise questions about risk transfer for the contracting public authority,' he added.
He said that some projects did 'offer a more challenging profile on construction', but added that the degree of risk transferred often depended on the experience and sophistication of the contracting public authority which, he said, 'varies greatly'.
Penalty clauses intended to enable the contracting body to penalise the contractors if problems prevented a particular building or service from being delivered are also less than rigorous, the study found.
Such mechanisms 'have been generally benign and have resulted in very limited deductions from [PFI] ProjectCo revenues to date,' it says.
Manley said that although the lack of punitive payment mechanisms might be viewed as a problem by critics of PFI, it often proved to be a virtue in practice. Successful projects required contracting authorities and the private sector to work together to improve overall service quality rather than potentially destabilising revenue cuts, he said.
PFmay2006
