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Analysis: what to expect from the new PFI model

The chancellor’s autumn statement is set to reveal the results of its year-long review of the beleaguered private finance initiative model.

The profit-sharing ‘equity clawback’ approach has emerged as the favourite, while changes to the underlying risk structure between public and private sector are also in the running.

Place your bets: see the latest odds on the likely runners and riders in the new PFI race

The clawback model would offset the cost to the private sector by the public sector taking back risk. This approach is similar to the model used by the Scottish Futures Trust, an arm’s-length company set up by the Scottish government in 2008.

Under this approach, headlines about extortionate costs for simple maintenance tasks such as changing light bulbs should become yesterday’s news, as soft facilities management is dropped from the deals.

How we got here

The Treasury’s “fundamental” review of PFI followed damning government committee reports, horror stories over maintenance costs and mounting public sector debt.

After chancellor George Osborne branded the model “discredited”, the onus fell on Treasury department Infrastructure UK to do away with the toxic brand.

PFI was introduced 20 years ago and grew into a multi-billion-pound market that has been emulated across the world.

Despite Treasury claims that no projects have been delayed, the 12-month review has “knee-capped us as an industry”, one project finance expert said recently.

“That the return is likely to be lower won’t affect contractors going ahead, unless the risk is too great”

David Mathieson, Turner & Townsend

From the contractor’s perspective, PFI deals have meant expensive, high-risk and time-consuming bids, but lucrative profits and hundreds of buildings that would otherwise have not been built – and to a high standard.

Miller Construction chief executive Chris Webster says the industry has “got to blame ourselves” for PFI’s bad reputation, “because we have not communicated all the successes”.

Evolution not revolution

Despite the time it has taken to complete the review, and protestations from IUK to the contrary, the industry still expects an amended model rather than a new one.

Pinsent Masons head of projects Michael Watson says it is important to offer investors and contractors a “familiar product and one that’s competitive not just in the UK but internationally as well”.

“A radical change would just cause more delays,” he adds.

Turner & Townsend head of public sector David Mathieson says the priority schools documents give the strongest indication of the “relatively modest changes”.

“Construction is very competitive and certainly contractors will be keen to get a chunk of the market – provided they can get a return,” he says.

“And the fact that the return is likely to be lower than it was won’t affect them going ahead, unless the risk is too great.”

Contractors’ view

The Treasury may insist the review has not caused delays, but Balfour Beatty’s deputy chief executive Andrew McNaughton tells CN that the market has simply “stopped”.

“Obviously we really hope they are going to come forward with something that gets that moving again,” he says.

Carillion chief executive Richard Howson has said he does not expect a great deal of change, besides soft FM, equity gain and risk share.

The main focus, he said, should be on streamlining the procurement processes for the benefit of clients and contractors.

“We really hope they are going to come forward with something that gets that moving again”

Andrew McNaughton, Balfour Beatty

Kier chief executive Paul Sheffield says the PFI debate is one of the elements “holding back billions of pounds of investment capital”.

“I don’t think it will be very different from the old PFI,” he adds.

Meanwhile, Skanska’s head of infrastructure Bill Hocking says: “We’re all expecting it to come back in a mildly different guise.”

Warning signs

Equity clawback could have a considerable impact on the market if it is not carefully measured, says KPMG’s head of UK infrastructure and construction Richard Threlfall.

He says there is a “particular concern” that government does not try to introduce the changes to existing contracts or those in procurement, which could lead to further delays and uncertainty for investors.

More transparency of returns could also help the market, says Mr Threlfall, who argues it will show it “in the round” - including the losses and costs incurred.

There has also been some scepticism over equity clawback and whether certain deals in Scotland have attracted significant bidder interest.

Whatever the model looks like, it will still ultimately mean more borrowing for government and the public sector – and via a process that is likely to come under intense scrutiny. It should be a starting gun, but projects may take time to get out of the blocks.

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