21 March 2003
The government's £40bn public-private investment programme was dealt another blow this week by authoritative claims that potential investors are snubbing the market, following a 'substantial' transfer of risk to the private sector.
Standard & Poor's, the City's biggest credit rating firm, has revised its ratings for new Private Finance Initiative projects to reflect the changing liabilities of the special purpose vehicles (SPVs) set up to bid for government contracts.
In a study published on March 19, S&P said that the government's insistence on 'increasingly aggressive' financial structures for public-private partnership contracts is 'forcing some key players away from investing'.
A 'lack of transparency and disclosure'– contracts are often not made fully public for reasons such as commercial confidentiality – was also a contributory factor, S&P said.
Consequently, S&P's average credit rating for PFI projects has slipped from one of the highest ratings, BBB+, to BBB– which could further discourage investors.
Credit ratings have become an important indicator of the strength and durability of public-private projects and contractors in recent years, because they reflect the chances of organisations meeting their financial obligations.
Troubled schemes such as Railtrack and National Air Traffic Services have led the government to underpin projects that are close to collapse, leading opponents to claim the private sector has not assumed enough risk.
But Adele Archer, S&P's public sector director, claimed the private sector is now bearing too much of the burden. She told Public Finance: 'If projects are now perceived as increasingly risky, they will be rated and priced accordingly. That will feed through to special purpose vehicles.'
These consortiums would then become less attractive to investors and would face difficulty in raising funding or borrowing in the commercial market. 'This limits the ability of SPV companies to bid for contracts,' Archer added.
S&P claimed that companies working on large, long-term projects, such as schools, hospitals and the London Tube network, would be most affected by investor scepticism.
Problems could also arise in the secondary market for contracts, where firms try to sell their share of a contract before it expires.
But Paul Maltby, PPP expert at the Institute for Public Policy Research, said: 'The increased transfer of risk, and consequent change in mentality of investors, could simply be viewed as the PFI/PPP market maturing.
'Public sector bodies are getting better at negotiating contracts and pricing risks to services more accurately – there's no doubt that the sector assumed too much responsibility in the past.'
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