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Lessons from across the border on how to structure future PFI

Many of us submitted our exam papers to headmaster for marking back in mid-February, as part of the Treasury’s “call for evidence” (not a “consultation”, mind).

Headmaster brought in a few consultant supply teachers to help mark the papers. Summer holidays came and went. We all returned to our desks, and seem to be no nearer to getting our marks, or a clear view of what the future private finance initiative will look like.

In the absence of any formal announcements from the staff room, it may be worth speculating. The “non-profit distribution model” has gained a degree of acceptance in the Scottish marketplace and can probably teach some lessons south of the border (and west of the Severn) as to how a different exam board is dealing with things.

Although the NPDM doesn’t quite do what it says on the tin, it has caused some major reappraisals. We are already seeing a move to introduce greater sharing of the profits made in selling on shares in PFI project companies.

The NPDM introduces a host of different issues as to how and when equity returns may be made. Pure equity investors in infrastructure may not find much to cheer about but organisations with investment and construction arms may find a basis for looking at future deals “in the round” – this is a crucial quid pro quo to ‘detoxify’ the PFI brand.

Another lesson from Scotland is to reappraise how PFI buildings are maintained and serviced. Those firms repositioning themselves as construction services organisations should note how the softer side of facilities maintenance is being banished from the NPDM. If it goes down this route, ‘new’ PFI is more likely to be just about buildings, assets and the hardest of hard FM.

What other issues could the new model address? The mantra of “risk borne by the party best able to manage it” could do with a rethink – and with it, the cynicism where current rules require the private sector to price issues that could be better (or more cheaply) laid at the procuring authority’s door.

Top of the list must be project insurance and changes in law risk. For the former, a number of closed PFI deals in the highways sector show that a sensible, bankable authority self-insurance approach is worth exploring. For the latter, maybe it is time to look more closely at how changes in law are addressed on public-private partnerships in other jurisdictions.

The bigger picture

The new model must be used to unlock different funding sources. There has been a lot of discussion about untapping the resources of pension and insurance investments but a resounding lack of progress on the current binding together of construction and operational risks.

Perhaps we should look at two separate models: a short-term construction and commissioning phase, based on shorter-term debt financing, and a longer-term operational concession to attract long-term pension funds (and maybe government can step up to the refinancing plate inbetween).

But a model – however good – without a pipeline of work behind it is meaningless. Let’s hope we get those exam papers back soon.

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