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PF2 projects list shelved as policy hangs in balance

Exclusive: Plans to publish a list of PF2 projects have been scrapped, with a decision on the future of PF2 to be made after the election.

In the Autumn Statement last November the government pledged to publish a list of projects to be procured through the private finance model “early” in 2017.

Plans to publish this list have now been put on hold, with a decision on whether to proceed with PF2 projects to be made after the election in June.

Among the schemes the market had been told might utilise PF2 were Highways England’s A303 Stonehenge Tunnel and the Lower Thames Crossing.

However, Treasury officials have stopped discussing PF2 policy with the market, and a decision on the future of PF2 will now be made after the election on 8 June.

A Conservative majority government could lead to a reshuffle, meaning new ministers would be put in charge of departmental and fiscal policy.

It is understood that a new iteration of PFI, to replace or update the Standardisation of PF2 Contracts (SoPF2) guidance, was being considered prior to the general election being called, due to the low take-up of PF2 projects.

PF2 has only been used on a handful of projects, including the Midland Metropolitan Hospital and schools batches procured by the Education Funding Agency, since its inception, after several departments decided not to use it on central government schemes.

One source said key government departments were now looking at a form of PPP under what’s known as ‘Project Phoenix’, which would see smaller-scale schemes worth less than £25m like health clinics procured using private finance.

Mark Elsey, head of infrastructure at law firm Ashurst, said that while it was “frustrating” there was another PF2 pipeline delay, the “fiscal pressures” motivating the government’s renewed interest in private finance remained strong.

He added: “The private infrastructure industry needs to be reinforcing the very real value and benefits that are already being delivered through PPP structures across the UK.

“There needs to be more empirical data to support these benefits and counter the negativity that is frequently promoted by those who are ideologically opposed to any form of ‘private’ finance for ‘public’ infrastructure, or who see PPP structures as a convenient target to blame for other failings.”

Jon Hart, infrastructure partner and PFI specialist at Pinsent Masons, said: “Lack of activity in relation to the PF2 pipeline is probably no surprise, given the relatively cool response given to the model as a way of procuring infrastructure.

“As a means of detoxifying the politically tainted PFI brand it has been relatively unsuccessful (certainly by comparison to the Scottish NPDM / Hub models).

“There has been the suggestion that the model could do with a tweak or two – most notably in relation to the shareholding in project companies by the public sector and the need for equity funding competitions after original sponsors have taken on the lion’s share of bidding risk.

“It remains to be seen whether this is going to see another iteration of formal ‘guidance’ to an already disappointed industry as an alternative to a list of raw, red-blooded new projects that are capable of being bid for and invested in.”

Among the changes to PFI introduced in PF2 were that government would become minority shareholders in the projects, the removal of soft FM services, and that a competition would be run to identify equity co-investors in PF2 projects after the appointment of a preferred bidder.

One private finance expert told CN: “You are going to see so much over the next 18-24 months that will be blown off course by Brexit.

“There are competing priorities within Whitehall, not to mention the fact there is now going to be a general election; it’s no surprise to see infrastructure finance low down the pecking order.

“PF2 has been a disaster… everyone in the project finance area has been ground down for so long now that none of this causes any surprises.”

Robert Meakin, partner at Clyde & Co, said: “While it was inevitable that the election would put another obstacle on the path to a new private finance pipeline (as if Brexit itself wasn’t enough), the underlying rationale for an effective iteration of the model remains, and can only grow stronger as investment in public infrastructure continues to lag behind essential needs. 

“Whoever picks up this brief after the election, the likelihood remains that there will be a positive announcement – albeit later rather sooner. By then, however, the risk is that the government may have spent so long reinventing the wheel on the PFI bus that many in the industry will have got tired of waiting, and booked an Uber to other opportunities.”

Recent problems with defects on Scottish PFI schools have led for calls for PPP schemes to be scrapped, but it is understood there is still a desire within the Treasury to push ahead with using PF2 for infrastructure, particularly around long-term programmes of work in social infrastructure such as schools.

Among the construction leaders who have told CN in recent months that they would be keen to look at PF2 opportunities are Balfour Beatty’s chief executive Leo Quinn and Murphy’s CEO Steve Hollingshead.

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