PFI: Road to nowhere

Infrastructure investment has become the coalition’s latest Big Idea, but no amount of leaves on the line can compare with the obstructions it has already imposed on largely “shovel ready” transport, education and health schemes. Last week’s announcements by the prime minister and chancellor may mean major programmes get the go-ahead, but the question remains, why have the lights been stuck at red for so long?

There appeared to be more than a whiff of political expediency about the announcements by prime minister David Cameron and his deputy Nick Clegg last week of £9bn of rail funding (which was portrayed as a much-needed show of kissing and making up by the party leaders, amid growing tensions within the coalition) and that by another Tory-LibDem duo, chancellor George Osborne and Treasury chief secretary Danny Alexander, two days later of £46bn of guarantees and loans to stalled infrastructure programmes (possibly a realisation of the drag on GDP from collapsing construction activity).

There were immediate accusations that much of this was a regurgitation of old schemes. In Cameron’s statement, £5.2bn of the £9.4bn announced were schemes already committed to, including Crossrail. The £4.2bn of new schemes is better than a poke in the eye, but hardly the “biggest modernisation of our railways since the Victorian era” as Cameron enthused, and are unlikely to start on site until at least 2014.

The chancellor’s package includes £40bn of guarantees to underwrite stalled projects; £6bn of temporary loans for PFI schemes that were supposedly prevented by the financial crisis from reaching financial close; and guarantees to support foreign firms buying £5bn of British goods.

The concept of the government guaranteeing or directly lending to PFI schemes is nothing new. Variations of this have been appearing over the past five years or so.There was some bemusement among the biggest of the UK’s PFI groups about Alexander’s inference in interviews that the biggest impediment to infrastructure has been a lack of private investment. Well-thought-out projects, in sectors with an established track record and experienced, financially strong teams don’t seem to have any problems attracting debt funding.

To qualify for these “new” initiatives, projects must be deemed to be nationally significant, ready to start construction within 12 months and good value to the taxpayer. However, the details of implementation remain hazy, as does the question of whether there is any new money in the package.

This could be yet another disruption on the line, on top of the seemingly interminable Treasury review of PFI. Building reported earlier this month that its findings would be further delayed until after parliament’s summer recess, potentially delaying the Priority Schools Building programme (itself a bit of a post-PFI fudge).

This suggests Osborne’s and Alexander’s announcement may be a stop-gap measure from a government that is desperate to build stuff, but has painted itself into a corner over its ideological opposition to PFI.

In a case of “if it ain’t broke do try to fix it”, the review was tasked with finding a less expensive model for using private investment that would transfer more risk to investors
and attract a wider pool of financing sources, particularly from pension funds.

This government has painted itself into a corner over its ideological opposition to PFI

The inherent contradictions in this brief suggest why it has taken so long. Despite the furore that has dogged the approach for the past 20 years, PFI/PPP has been shown by most independent analysis to have worked satisfactorily for client and provider, at least in mainstream, repeatable health, education and prison projects. Transport presents greater construction challenges, since each project is a one-off and volume risk is always greater than in health and education.

There is also the challenge of getting pension funds on board. In theory, the 25-30 year duration and low-risk profile of operational concessions is ideal at matching the long-term nature of pension fund liabilities. But pension funds generally shy away from construction risk. Canadians, however, have addressed this by funding construction through bank lending during construction then, when operational, converting this into tradeable bonds - which have been popular with funds.

Basel 3 requirements will also present a challenge to banks’ appetite for long-term lending. But the history of PFI has been one of steady evolution and innovation. Don’t
be too surprised if, when finally unveiled, the long-awaited “son of PFI” is almost the spitting image of its parent.

Alastair Stewart is building and construction analyst at Canaccord Genuity