PPP – drip, drip… silence

Throughout history the UK has been responsible for numerous infrastructure inventions that have rocked the world – from the jet engine through to pneumatic tyres, the telephone, railways, good old tar macadam… and PPP.

And so it’s with a weary heart that we gather together to witness England’s termination of PFI as we know it (or PF2 as it became in 2010) – a procurement model that was tried, tested and proven in the UK before being exported (with local tweaks) to all corners of the globe.

The British infrastructure community this week turned mirrors to the wall on hearing UK Chancellor of the Exchequer Philip Hammond’s pronouncement on the fate of PFI and PF2 in his autumn budget speech in parliament.

Oh come along, dry your eyes, it’s hardly as though there was a PFI / PF2 (pick your flavour) pipeline of any scale in the UK and it’s not all doom and gloom… he’s hinting at a massive uptick in infrastructure investment down the line, just not as we previously knew it and with no timeline for a vague intention.

For now – in the post-Carillion world – there are three transport projects in the pipeline and most sources believe at least two of them will make it to financial close.

The most promising is Silvertown Tunnel which received development consent in May and has two bidders lined up – Cintra versus a consortium of Hochtief and ACS with John Laing. This £750 million project crossing the River Thames is safe on two fronts. Beyond it being advanced in procurement, it is ring fenced by its distance from central government, devolved to Transport for London and the Greater London Authority.

The two other English transport projects are the A303 road and the Lower Thames Crossing, but sources are divided over whether they will both be delivered as PPPs (or happen at all).

Most reckon the A303 under Stonehenge will be grandfathered through as (to their minds) it has passed the point of no return. The same cannot be said of the Thames Crossing, and if one of the two is to be thrown under this bus, this latest attempt to improve connectivity in London is your most likely contender for pavement pizza.

As for the four prisons that were destined to be delivered under the PF2 programme and sparked renewed interest in the market at the end of 2017, they have bitten the dust as PPPs (but then it depends on the business case).

According to sources, one of the projects – the £170 million Glen Parva Prison in Leicestershire – looks set to progress as a design-build, publicly financed by HM Treasury. It would appear criminals are so thick on the ground in this part of England that they cannot live without it.

The other three are firmly on the back burner, with the potential for them to be delivered under some re-branded PPP delivery mechanism… but no time soon.

And there you have it – the sky (what little there was of it) is not falling in. Two of the three English transport PPPs should continue unabated, while the third one hangs in the balance. Meanwhile, the prison programme is 75% dead, 100% dead in a PPP sense for now.

Philip Hammond’s statement that “I have never signed off a PFI contract as chancellor, and I can confirm today that I never will” gave naysayers hope that private sector involvement in the delivery and operation of public infrastructure was at an end… but their celebrations are premature.

As one source uncomfortably close to Downing Street says: “It’s a bit like returning to a tap that you thought had been turned off and it’s still dripping a little bit… well now it’s being turned off. But this comes as no surprise to anyone in the market as they’ve known for eight years that PFI was dead.”

The real bottom line for English PPP: plus ça change, plus c'est la même chose. But then, a name change and a little Celtic reinvention is on the cards.

PFI by (yet) another name

Brace for a re-brand and re-launch, but don’t expect it any time soon. Cruel experience leads one to expect a change of this nature to take at least two years to implement. This ain’t our first rodeo, and it won’t be our last.

Take for example Scotland’s Non-Profit Distributing model which evolved from PFI. Under NPD, private sector returns are capped to shield projects from sponsors making “excessive profits”.

This cap was achieved by having pinpoint private sector equity shareholdings that provided no dividends, sending any surplus returns generated to the public sector. The private sector sponsors receive a fixed-rate return from the subordinated debt they invested.

This, however, fell foul of EU accounting rules introduced in 2014 that landed NPD projects on the government’s balance sheet as the SPVs were subject to government control and surpluses accrued to it. Famously, this heftily impacted Aberdeen Western Peripheral Route.

Then Wales took NPD and shaped it to its requirements with the Mutual Investment Model. MIM does not involve the capping mechanism that caused (in part) the NPD programme balance sheet issues, but by allowing for a public/private shareholding mix, it allows the public sector to share in surpluses generated by projects. On that basis, it dodged a bullet on the EU accounting front.

In contracts to the Scottish model, MIM provides for Welsh public sector sharing of up to 20% of the total equity stake on a pari passu basis, though it has yet to be used in anger. Projects are to have a gearing of 90:10, with at least 80% of project equity held by the private sector – which keeps it off the government’s balance sheet.

MIM limits the potential for the private sector to make “offensive” refinancing gains with one-third making its way back to the public side, and – of the remaining two-thirds – the public sector benefits from the upside to the tune of its equity stake.

Amusingly, the Welsh model is now being shipped back to Scotland for it to re-model the NPD to something that sits even more comfortably with the public sector.

And so we can expect England to join this virtuous round-about with the greatest challenge its faces being to dream up its very own three-letter acronym.

And back to England…

While detail remains sparse, Hammond in his speech made hefty commitments to infrastructure investment “expanding the National Productivity Investment Fund once again” to more than £38 billion by 2023-24.

He proudly points out that over the next five years that amounts to a public investment growth of 30%, the “highest sustained level in 40 years”.

Hammond banged on that “half of the UK’s £600 billion infrastructure pipeline will be built and financed by the private sector”, but omitted to give a timeline for that investment. Anyone with an O in maths (forgive me, I’m of a generation) will tell you that’s £300 billion of private finance.

As to sectors, social infrastructure has clearly taken a back seat as he singled out roads, railways, research, and digital infrastructure as the primary recipients “that will power this country in the 21st Century”.

He chirped on: “I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector. But there is compelling evidence that the Private Finance Initiative does neither.”

Oh let’s just be grateful he’s not about to start unravelling hundreds of operational PPPs… though this Centre of Excellence he mentions sounds a tad ominous. A body in the Department of Health and Social Care to improve the management of existing PFI contracts, how could that be bad news?

By the pricking of my thumbs…