Feature Story

EXCLUSIVE: Does PFI still have the X-Factor?

Kevin Robertson a partner in the public services team at Dickenson Dees looks back over 2009 and sheds light on what 2010 holds for the love it or hate it Private Finance Initiative (PFI).

As 2009 comes to a close and we enter a new decade, the newspapers, TV and radio schedules are full of look-back reviews of 'the Noughties'. Whilst the mainstream press concentrate on the music, fashion and celebrities of the last 10 years, it seems right to look at how the major public investment vehicle of that period has ended the decade and what the future may hold for it.
The credit crunch has had (and will have) a major impact on public investment in general and on PFI in particular. So as 2010 comes around does PFI enter it as a winner with a bright future ahead or as a novelty act that very much 'of its time' was both loved and loathed in equal measure. In short, is it Joe McElderry or John and Edward?

Anybody who has been in involved in public procurement over the last 10 years will know the importance of the PFI to the large increase in public infrastructure over that time. What started as an idea of the Conservative Government of John Major (borrowing on existing DBFO models) was, after a period of reflection, wholeheartedly embraced by the Labour Government of Tony Blair and his then Chancellor Gordon Brown. It became almost the procurement tool of choice for nearly all major infrastructure projects. As its reach expanded the public sector began to perfect its use as a delivery vehicle, albeit after some painful (and expensive) mistakes. It is fair to say, however, that by the latter years of the decade, PFI procurements had become relatively straightforward to deliver with both the public and private sectors having sufficient access to experienced delivery teams. 18 month procurements from OJEU to Financial Close were becoming a realistic expectation rather than the fanciful pipe dream they were back in the early days of the PFI.

Just as the model was hitting its stride the credit crunch came from left field and tripped up a number of projects. It is fair to say that the threat of global financial system meltdown wasn't a regular feature on many projects' 'Risk registers'. It may prove, though, to have been the biggest risk of all.

'PFI' is of course a three letter acronym (or 'TLA' – jargon being another feature of the last 10 years and one of the least popular). PFI stands for 'Private Finance Initiative'. The credit crunch rocked the 'P', temporarily removed the 'F' and meant that all those involved had to rely solely on the 'I' to keep projects on track. It is testimony to the level of maturity that the market had reached before the crunch came along that many projects managed to push on through the darkest days of 2008 such that through the middle to latter stages of 2009 a new level of optimism (however slight) began to be felt.

A number of funders who suddenly found themselves unable to lend to SPVs as credit committees turned off the flow of funds have begun to emerge once again. We have even seen some new players coming into the market. Anecdotal evidence suggests that some funders can once again contemplate funding a £50 million deal alone (a pre-credit crunch norm) without the need to form a club of two or even three banks for such a level of lend as was seen through 2008 and early 2009. Margins too are softening and whilst there is no suggestion that they will fall back to the pre-crunch levels they may at least have peaked. The current situation is therefore one of slow but definite recovery in the PFI market as a whole, with funders lending, schemes closing and much needed facilities being built. The biggest question now facing the market is what will happen next?

2010 will bring a general election – that much we know. It may also bring a change of government – that (despite opinion polls) remains speculation. As a working assumption, however, it is highly likely that whoever wields political power as we move towards 2011 will have to look seriously at reducing all areas of public expenditure, including those projects earmarked for delivery using PFI. There has been a suggestion that a Conservative Government may even look to abolish PFI all together with a view to introducing a whole new mechanism for levering private finance into public services. Another generally held view is that projects may be put on hold or slowed down pending a general review of the public finances and that, in time; they will start to flow again.

It is suggested that it would be a major step backwards if, having made it (painfully) through the auditions, boot camp and the live rounds, PFI was then eliminated just when it seemed a place in the final was within its grasp.


Kevin is a Partner in the Public Services Team having joined the firm eight years ago from the local office of Eversheds. Kevin has extensive experience of advising both the public and private sectors in relation to a range of PPP and PFI projects and has particular expertise in the education, BSF, local authority and NHS LIFT sectors.