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30 October 2018
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As bad as it seems?

Why UK Chancellor Philip Hammond’s announcement to abolish PFI and PF2 could yet save private finance
As bad as it seems?

Chancellor Philip Hammond’s Budget announcement that the government is to scrap PFI and PF2 came as something of a jolt.

While the announcement did not make any reference to reviewing the way in which private investment is used in public infrastructure, Hammond’s preceding comments – that half of the UK’s infrastructure is delivered via the private sector and that he remains committed to “the use public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector” – gave a hint that private involvement in public infrastructure is not over.

Furthermore, the document from the Treasury providing more background on why the models have been abolished also said the government would “continue to support private investment in infrastructure through a range of successful established tools, such as Contracts for Difference, the Regulated Asset Base Model and the UK Guarantee Scheme”.

And buried away in the Budget document itself was a single line that said that, as part of its initial response to the National Infrastructure Assessment, the government “will review its existing support for infrastructure finance, to ensure that it continues to meet market needs as the UK leaves the EU”.

This could be the first hint that the government is not giving up on private finance altogether, but instead wants to detoxify the brand. After all, the Thames Tideway Tunnel – lauded by Hammond’s predecessor George Osborne – was not a PFI or PF2 deal, and yet managed to pull in plenty of private sector funding.

As an industry, though, it may be tempting to adapt that great American diva, Tina Turner, and bellow: “We don’t need another review!”

After all, the PPP industry in the UK over the past decade has seen the review that created PF2, reviews in Scotland and Wales that led to the non-profit distributing (NPD) model and the mutual investment model (MIM) respectively, a review in Northern Ireland that led to the now abandoned Third Party Developer (3PD) approach and, more recently, another review in Scotland that is pointing towards using MIM in place of NPD, as well as a Treasury review of PF2 completed earlier this year that will now never see the light of day.

However, PF2 remains politically as toxic as PFI (unlike NPD and MIM, for example, which have not generated anything like as much negative press), so developing a model that appeases the critics, but is still able to leverage private finance to deliver high quality public infrastructure, would be a prize with waiting for.

Many see this announcement as an attempt to head off the attacks from Labour, which has said it will take all existing PFI deals back in-house. Hammond rejected that idea in his speech, insisting that the “ruinous” penalty clauses would simply result in “throwing good money after bad”.

Instead, the chancellor revealed he will establish a centre of excellence “to actively manage these contracts in the taxpayers’ interest”.

Presumably, this will be an offshoot of the Infrastructure & Projects Authority (IPA), which has been managing its stakes in PF2 projects for some years already.

It does leave some big questions to be answered, though. For a start, how will the government now fund the A303 and Lower Thames Crossing projects – mentioned in the note but only as far as to say the government remains committed to them? And what of the Silvertown Tunnel, in procurement but not mentioned by Treasury at all in its reference to abolishing PFI and PF2?

For the government, of course, this latter project is essentially a devolved issue for Transport for London. But can the capital’s transport agency realistically go ahead with a model that is explicitly not backed by central government?

Furthermore, up until very recently there were plans for five new prisons to be delivered under PF2, while there were also big plans for new military accommodation using the model.

Assuming that the government still wants to deliver this infrastructure, it will need to find the cash from somewhere. Might the IPA be required to ‘do a Scotland’ and consider the MIM?

Perhaps more likely, it will simply look to develop more bespoke arrangements, based around joint ventures and other approaches that will seek to bring in private finance, without the hassle and criticisms associated with trying to get a PF2 scheme off the ground.

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Why UK Chancellor Philip Hammond’s announcement to abolish PFI and PF2 could yet save private finance

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