A new report from the National Audit Office on the Private Finance Initiative says that future annual charges for operational PFI contracts which continue until the 2040s amount to £199 billion, even if no new  deals are entered into,

The report - PFI and PF2 - by the public spending watchdog on the rationale, costs and benefits of PFI says there are currently over 700 operational PFI and PF2 deals, with a capital value of around £60 billion - annual charges for the deals amounted to £10.3 billion in 2016-17.

The NAO briefing was prepared prior to the announcement on 15 January 2018 that construction company Carillion was in liquidation.

The PFI and its successor, PF2, are forms of Public Private Partnerships (PPPs). In a PFI or PF2 deal, a private finance company – known as a Special Purpose Vehicle (SPV) – is set up and borrows to construct a new asset such as a school, hospital or road. The taxpayer then makes payments over the contract term (typically 25 to 30 years), which cover debt repayment, financing costs, maintenance and any other services provided.

UK highest user of.off-balance sheet PPPs among European economies in the G7

In 2012, HM Treasury considered and rejected the option of bringing all historic PFI project debt onto the government’s balance sheet and including PFI investment in departmental capital budgets. The option was rejected in part “because of the perceived risk that the UK’s credit rating would be downgraded.”

The UK has been one of the most common users of off-balance sheet Public Private Partnerships (PPPs), such as PFI and PF2, across Europe. UK off-balance sheet PPPs represent 1.7% of GDP, the third-highest in Europe and the highest among the European economies in the G7.

The NAO report says the government reduced its use of PFI after the 2008 financial crisis, as the cost of private finance increased and as Parliament also became increasingly critical of the model.

The NAO are commenting on the programme as a whole and said it does “not seek to form a view on the model or individual projects.“ nor on the value for money (VfM) of PFI and PF2.

“Still a lack of data available on the benefits of private finance procurement”

However, the public auditor has highlighted a number of key points which have emerged from its work, including the fact that budgetary and balance sheet incentives remain. 

As part of PFI reform HM Treasury considered removing incentives, unrelated to VfM, which have driven the use of private finance but it chose not to. The report says that if capital and cash budgets are insufficient, private finance may be the only investment option for public bodies.

There is also “still a lack of data available on the benefits of private finance procurement”, the report says.

The report also refers to the Infrastructure and Projects Authority (IPA) updated analysis of the National  Infrastructure and Construction Pipeline delivered to the Cabinet Office and HM Treasury in December 2017. The IPA has identified a need for more than £300 billion of investment in social and economic infrastructure in the five years to 2020-21, with a further 10 year projection of around £600 billion of public and private investment, covering the period 2017/18 to 2026/27.

The investment spend to 2020/21 includes £16 billion by the regulated water sector and the £2.3 billion flood & coastal erosion programme.

Thames Tideway Tunnel construction supported bycomprehensive government support package

The IPA report also includes the Thames Tideway Tunnel which is being financed and delivered by independent infrastructure provider Bazalgette Tunnel Ltd, the Special Purpose Vehicle funded by a number of institutional investors.

According to a briefing by Moody’s rating agency, as a government-designated infrastructure provider, BTL benefits from strong government support to complete the project. A comprehensive government support package put in place includes:

• insurance of last resort provision;
• liquidity in case of market disruption;
• contingent equity support;
• and compensation payments if the project is terminated for becoming unviable.

A £1 billion 10-year committed revolving credit facility has also been available from day 1 to support ongoing capex requirements.

While shareholders’ commitment to provide upfront equity of around £1.274 billion provided significant funding at the initial stages of the project, significant funding needs will require ongoing access to capital markets during the construction period, the briefing says.

Access to additional funding will likely be required from around 2017/18, just after the major tunnelling works have commenced. The briefing note says:

“However, the liquidity embedded within the financing structure ensures that BTL can withstand market disruption of at least 24 months, without delaying the construction works.“

Government's UK Guarantees Scheme can issue up to £40bn of guarantees for ‘nationally significant’ infrastructure projects 

The UK Government has also separately put the UK Guarantees Scheme in place to support private investment in ‘nationally significant’ UK infrastructure projects. The scheme, which can issue up to £40 billion of guarantees and is open to at least 2026, has offered construction guarantees since June 2017.

To date UKGS has issued 9 guarantees totalling £1.8 billion of Treasury-backed infrastructure bonds and loans, supporting over £4 billion worth of investment.

Managed by infrastructure finance specialists in the IPA, the remit includes assessing whether a project is financially credible, ready to start construction and the project represents value for money. Treasury ministers then decide whether a project is eligible, following which the application is put before a risk committee for approval or rejection.

Click here to download the National Audit Office report PFI1 and PFI2

Click here to download the Infrastructure and Projects Authority Analysis of National Infrastructure and Construction Pipeline

Click here to download Moody's Thames Tideway Tunnel briefing