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PFI’s successor may look remarkably familiar

Joest Bunse

Following Carillion’s collapse in January, the Budget marked the beginning of the end for the private finance initiative (PFI) and private finance 2 (PF2).

The government, while honouring existing contracts, will abolish the use of either model for future projects.

The move could also signal a shift in the government’s approach to funding infrastructure projects – particularly if it develops a new financing model or even adapts alternative funding tools used in other sectors.

But is this likely? We believe that the chancellor’s announcement might not signal the end of PFI after all. The government will likely continue to make use of public-private partnerships (PPPs) – albeit in a different form and by a different name.

Making the case for PPPs

Though PFI contracts have come in for criticism, much of the debate overlooks their many advantages – namely, risk allocation among their contracted participants.

Despite Carillion’s failure, the public sector allocating risks to the private sector makes sense, provided that such partnerships are correctly structured. This is because one significant detail is often overlooked in the analysis of Carillion’s demise: namely, its two distinct roles as a PFI subcontractor and as a direct public sector contractor.

In the two PFI hospital projects for which Carillion was the PFI counterparty, it was the private sector and the European Investment Bank that lost out. And, thanks to the use of PFI, the UK taxpayer will likely pay less for the construction of those hospitals compared with a scenario where the public sector had directly contracted with Carillion.

“The main alternative option – funding all infrastructure on the public balance sheet – does not seem to be on the table”

In any case, it’s likely that a new funding mechanism will closely resemble existing features of the PFI framework. Indeed, the UK has not only the largest but arguably the most efficient PPP market in Europe.

With a high conversion rate of approved-to-executed projects, and thanks to an investor-favourable legal system as well as a common language shared with international investors, the UK’s PFI framework has fuelled growth for privately financed infrastructure projects.

When it comes to devising an alternative, there are few if any countries with a more efficient PPP framework to look to. In fact, the two that would come to mind – the US and Canadian models – are already similar in scope to the UK PFI, so the opportunities for ‘lessons learned’ are somewhat limited.

A familiar successor?

Ultimately, the abolition of PFI may not create markedly different financing options. The main alternative option – funding all infrastructure on the public balance sheet – does not seem to be on the table.

What’s more, the Budget appears to have left the door open to use PFI under a different name. Philip Hammond said the government remained “committed to the use of PPP where it delivers value for the taxpayer and genuinely transfers risk to the private sector”.

Given this, it seems likely that PFI’s successor may look remarkably similar, after all.

Joest Bunse is associate director at S&P Global Ratings 

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