Treasury denies PF2 makes schemes more expensive

The head of the Treasury’s infrastructure unit, Geoffrey Spence, has defended the government from accusations that the revisions to PFI announced last week could actually make schemes more expensive.

Spence, chief executive of Infrastructure UK, said the new-style PF2 contracts would be cheaper if you factored in the returns to government departments which will now invest in the schemes.

The welcome for chancellor George Osborne’s launch of the “son-of-PFI” policy in the Autumn Statement last week was tempered by fears that changes to the financial structure of PFI project vehicles might make schemes more costly, therefore making it harder for government departments to justify the expenditure.

Spence said that under the PF2 contracts, which will be used to deliver £1.75bn of new schools, project vehicles would be expected to be made up of “above 20-25%” equity, with the rest funded by debt. This compares with a ratio on current projects of around 10% equity to 90% debt.

Consultant KPMG said last week that the capital cost of projects could rise by 10% on projects funded through 20% equity, because equity investors expect about double the return that banks do.

Spence denied it would cost more, saying: “Firstly, business theory suggests that if you have less debt, then the returns on equity should be lower. Secondly we’re facilitating that [equity] by having a funding competition for equity [investors] at, or coming up to, financial close - we think that will also reduce the cost.”

Spence said a typical project would see a third of the equity invested by government departments, and managed by a central Treasury unit, with the departments receiving all the returnon their investment.

He said: “Crucially, if we’re providing the extra equity by way of public equity, and the benefit of that goes back to the procurement authority, then […] that [return] negates the otherwise extra cost that could be associated with the higher gearing.”

Spence also said the government was likely to reimburse companies for their bidding costs if projects were cancelled by the government for exceeding a new 18-month deadline to complete procurement.

However, he cautioned that the industry should not expect a huge additional pipeline of projects to come forward. “We shouldn’t forget that PF2 is being launched in an environment where there is still huge pressure on how and where government money is used,” he said. “That isn’t going to change - in fact if anything last week’s statement indicated the financial situation is getting tougher.”