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The son of PFI

With PFI (including BSF, LIFT, ISTC), we were certain of certain things.

Some of those things we liked, such as new roads, new buildings, contractual certainty, availability of funding and a clear pipeline. But some we didn’t, including  competitive dialogue, project costs, inflexibility, imperfections in standard form and delays in procurement.

These certainties were not there at the outset - they were the result of a long period of evolution. Indeed, as the global financial crisis hit, that evolution was still happening. We were discussing outcomes versus availability, the imperfections in standard form, preferred bidder funding competitions, pricing, how to evaluate the cost effectiveness of PFI, how to reduce procurement cost and time and, inevitably the competitive dialogue. But all of this was taking place in the context of a certain pipeline.

Move the clock forward from the beginning of the global financial crisis, to the genesis of the coalition government and the Spending Review and the National Infrastructure Plan. The evolution of PFI has frozen. In its place we have questions and uncertainties in the context of a diminished and far less clear pipeline. Does removing what the comprehensive spending review termed “perverse incentives”, mean canning the whole programme? Or are we to believe - based on the benefits which PFI brought to public procurements - it will still be used?

Which model?

It seems that PFI will not be the prevailing model for public-private procurement in the UK. But will any single new model prevail?

Tax increment financing seems attractive. It is widely used in the United States. It is however not readily exportable without legislative changes and, for example, a good deal of work on how one captures the increment which will pay back the funding with sufficient certainty to make it privately financeable. Typically it is available to counter “blight”; to trigger urban regeneration. Arguably it is only applicable in marginal cases where traditional types of bank funding would not otherwise be forthcoming.

The Regulatory Asset Base model exists already for utilities. The arguments for its wider application are indeed persuasive but, as with TIF, it is a model which will need to be moulded to fit sectors where it is not already applied - and even its most vociferous proponents acknowledge the difficulty in applying it in social infrastructure. There also seems to be a question over how enthusiastic a Conservative led coalition would be on widespread price regulation.

The Green Infrastructure Bank will support projects, but needs to be capitalised. Value capture schemes (such as local asset backed vehicles) work very well on paper. But these are somewhat dependent on sustainable land values, which at the moment, seem uncertain. Commercial banks do not like uncertainty (or at least not at old-fashioned PFI margins).

So while there are many claims to be the heir to PFI, one should not underestimate the time consumption and evolutionary pains of delivering new models which will be readily applicable to all the infrastructure demands of the government.

Perhaps as the current parliament itself matures, and the next election looms, time spent on developing new models might be better spent on developing new infrastructure under the old  certainties of a - perhaps slightly imperfect - PFI model.

Nicholas Iliff is a partner at Pinsent Masons

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