As part of his Autumn Statement, Chancellor George Osborne is tomorrow expected to unveil a wave of infrastructure projects including new schools, hospitals and roads, to go forward under a revamped version of the Private Finance Initiative, to be known as Private Finance 2 (PF2).
When in opposition, both Coalition parties were often critical of the last Labour Government’s use of PFI to fund long term infrastructure investment across the country, insisting that the details underpinning PFI contracts left the taxpayer exposed to higher costs over the long-term.
More recently, a 2011 Treasury Select Committee report deemed the benefits of PFI “illusory” and noted that, despite often incurring a higher cost of borrowing than traditional routes, Government departments had become “addicted” to PFI as a means of reducing up-front cost and moving expenditure off the public balance sheet. This prompted the Government to scale back new PFI investments and announce a review of existing PFI contracts in an attempt to renegotiate the terms upon which they were based.
However, since this announcement and against a backdrop of a faltering economy, the Government has been under mounting pressure to set out how it intends to reform PFI to support major public sector building works in the years ahead.
Details emerging today suggest we will soon know the answer. So, what do we expect to be new about PF2?
- Profit sharing – Under the revamped PFI, the Government will become a minority stakeholder in project companies, giving it a seat on the board and a share of profits. Reports suggest that this will typically equate to a stake of around 20%, but it could be as high as 49%.
- Transparency – It is thought that project companies will be made to publish details of profits and also make future taxpayer liabilities transparent.
- Tighter timelines – In order to speed up the assembly of a project pipeline and avoid a re-run of the PFI process where projects could take up to five years to reach financial close, it appears there will now be an 18-month limit on project negotiations.
- Room to re-negotiate – The Government is also expected to introduce new contract clauses to allow hospitals and local authorities room to renegotiate service agreements with other providers, if they are more cost effective.
The Government will hope that PF2 is capable of kick-starting major investment programmes across the country, but that reforms ensure the taxpayer is able to share in any returns made on projects, as well as underpinning delivery risk. However, until we know more about how these measures will work in practice as part of a broad programme of investment, it is impossible to know whether the flaws of the previous regime will re-surface.
As always, the devil remains in the detail.
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