Feature Story

PFI - past, present and future

Partner Adrian Turner and Sophie Robinson, Assistant Project and Infrastructure Finance Group at Eversheds discuss a monumental year for PFI and the possibilities that a new government could bring in 2010.

2009 will be remembered as the year in which raising finance for PFI and PPP transactions became a monumental task. The number of active lenders in the market significantly reduced and those that remained hardened their positions. Financial close eluded a number of deals and those that did close found that terms which were previously on the table were no longer available.

The Treasury's response was clear. Projects must continue as planned, despite unfavourable financial market conditions; jobs and the economy could and would be supported by projects already in the pipeline. On 3rd March 2009, the Chief Secretary to the Treasury announced that the Treasury Infrastructure Finance Unit (TIFU) would be established. TIFU's objective is to lend to PFI projects on the same terms as commercial lenders (albeit on a temporary basis) where insufficient private sector or European Investment Bank (EIB) funding is available. Eversheds saw this first hand on the

Greater Manchester Waste Project, the first scheme to benefit from the new regime, reaching financial close in April 2009 with £120m of TIFU funding. It is envisaged that a total of £13bn of public investment in procurement will be safeguarded in this way.

Despite the challenges and after a slow start to the year, the UK projects market persevered. The £6.2bn M25 PFI project, one of the largest PFI projects to date, finally reached financial close in

May 2009 one year after having launched its post preferred bidder debt funding competition. An initial pool of 41 banks were approached but by December 2008 only six banks remained interested and there were doubts about promised elements of the scheme being delivered before the 2012 Olympics.

Eventually, £925m of senior debt was raised together with £200m of equity and a separate £185m loan from EIB. Although the terms and high margins demanded by the funders contributed to an increase of over £1bn in the total cost of the project during the preferred bidder stage, the fact that 16 commercial lenders contributed to the senior debt was evidence of availability of funding in the market that many thought wasn't there.

In other sectors, 15 Building Schools for the Future schemes reached financial close in 2009. Only three of these closed prior to June, with a marked increase in the number of projects signing on the dotted line towards the second half of the year. Partnerships for Schools (PfS) has continued its drive to bring a greater number of schemes to close with a focus on standardisation of documentation and risk transfer that is familiar in the market. The procurement review implemented mid-2008 has seen a more streamlined process intended to reduce timescales and bid costs. Further reviews are currently under way with a view to generating further efficiencies in the process and building on the cost savings already anticipated across the programme.

Looking ahead, it may be that PFI/PPP is not over the worst just yet. Certainly projects are increasingly able to secure finance and reach close, when at the beginning of 2009 the prospects of doing just that seemed slim. The terms on which they are able to do so, however, are not comparable with what we now know were favourable funding conditions earlier in the decade. Similarly, the reduced availability of funding has meant recourse to funding clubs. Bidders and procuring authorities must now manage multiple (and often complex) credit committee approval processes and due diligence reviews.

Alistair Darling's announcement in the pre-Budget Report of a new agency to coordinate the funding and delivery of the UK's major projects can be seen as a positive step towards addressing some of the issues that became apparent during 2009. Infrastructure UK's objective of devising and encouraging more varied forms of investment will, if it delivers on its promise, give procuring authorities greater choice and flexibility in funding PFI/PPP transactions. A coordinated approach to investment should also provide greater control over budgets and enable the government to prioritise projects across all sectors in the longer term – focusing immediately on funding options for the proposed high-speed rail link between London and Edinburgh and low-carbon energy infrastructure.

The impending general election could also be a turning point for PFI. The Conservative Party has been critical of what it sees as the use of PFI simply to keep liabilities off-balance sheet, and has voiced concerns over the efficiency of the multibillion pound BSF programme. George Osborne, Shadow Chancellor, was quoted in the Observer as saying that: "Labour's PFI model is flawed and must be replaced. We need a new system that doesn't pretend that risks have been transferred to the private sector when they can't be, and which genuinely transfers risks when they can be." He has also stated that the Conservatives are drawing up alternative models to PFI to improve transparency and value for money, and are looking at the appropriateness of delivery models such as BSF's Local Education Partnership.

What a change of government may do with PFI is an unknown quantity but certainly there is a clear drive to review and where necessary renew systems of infrastructure investment and funding. Whether Alistair Darling's Infrastructure UK is enough to address the concerns that the difficulties of 2009 have raised and the problems that the market has to overcome remain to be seen. What is clear though is that the need for continued investment in infrastructure in the UK remains. Whilst funding streams may be reduced, and delivery models may be changed, there would appear to be a continued need for PPP and PFI to assist in delivering that infrastructure.