It may not be an entirely new sector in the UK project finance market, but a number of recent developments suggest the 'blue light' market could be one to look out for in the future.

Over the next 12-18 months, there are at least a dozen fire service or police PFIs which can be expected to either come to market or move toward financial close.

Most of the deals are relatively small - normally in the £40-100 million region - meaning that they can get away with a club of no more than three banks.

Indeed, the size of the debt package is what many believe could make blue light deals increasingly attractive to commercial lenders in an environment where - despite an apparent return of the market - large tickets are still few and far between.

The Stoke and Staffordshire Fire PFI, which reached financial close in October 2009, is an example of how keen the market appears to be for these vanilla transactions.

A more detailed case study on the project can be found below, but it is worth looking at one statistic that makes the deal stand out - that an incredible 20 bidders submitted expressions of interest when the PFI hit the market in 2007.

Considering that many BSF deals of a similar size - in terms of debt package at least - struggle to find more than a handful of bidders, this is an impressive achievement.

Of course, the fact that this deal came to market before the credit crunch certainly helped, but there remains a large pool of sponsors and financiers alike which see blue light as a sound bet in difficult times.

With bidders increasingly deterred from BSF deals by spiralling bid costs, which can only be recouped if the sponsor has a good hit rate, the blue light sector now offers better value for a similar equity outlay.

And the more bids on the table, the more competitive the procurement process, which is good news for the public sector. It is a dynamic which only serves to help drive up value for money for a procuring authority - something which should be the principle motivation behind any PFI deal.

Stoke & Staffordshire Fire PFI

This was a deal noteworthy for the level of competition it generated among private sector bidders, as well as being a bellwether for a sector likely to flourish in a tricky market.

The project - the first of two for the Stoke-on-Trent and Staffordshire Fire Rescue Authority - involves 10 fire stations and is a mixture of new-build and rebuild schemes.

It was the second fire services PFI to reach financial close in four months following the John Laing-sponsored North East Fire & Rescue deal, which got away in June 2009.

Two deals does not, admittedly, a flood make. But in a sector in which the previous 12 months yielded not a single financial close, it is certainly a sign that things are beginning to change.

The project came to market on OJEU in June 2007, with 20 potential bidders submitting expressions of interest (EoI). Of these, an equally impressive 14 were subsequently pre-qualified, with 10 progressing to the mini-ISOS stage and six to ISOS.

An initial shortlist of three bidders was unveiled in November 2007. The teams were as follows:

• Collaborative Services Support - John Laing, Shepherd, Equion
• Fire Support - Bilfinger Berger, Stepnell, NordLB
• Kajima Partnership - Kajima, John Sisk, Robertson

This list was reduced to two in May 2008 when the John Laing consortium was eliminated from the running. Blifinger Berger's Fire Support team was confirmed as preferred bidder in November 2008.

Given that the preferred bidder announcement came when the maelstrom in the banking world was at its fiercest, the year that elapsed before the deal could reach financial close does not reflect on the quality of the deal.

NordLB, which also took a minority equity stake in the project, had envisaged being able to act as sole MLA on a debt package of around £42 million. The credit crisis, and subsequent reduction in ticket sizes across the project finance world, meant that the bank ultimately had to go to the market to find a second lender.

Nationwide - which has been increasingly involved in similarly-sized BSF deals throughout 2009 - joined NordLB in the summer, with financial close coming in October. The 26-year senior debt tranche ranged from Libor +245-260bp in price.

As with any deal straddling the start of the recession, there was a longer gap between preferred bidder and financial close. But sources involved in the deal say that there was no shortage of potential funders - a fact reflected in the relatively competitive pricing structure.

The Future

The deal flow going through 2010 and into 2011 in the blue light sector is looking as healthy as any. So, why are these projects suddenly coming to the fore?

The answer, it would seem, lies in a combination of their simplicity and the promise of good returns from relatively low bid costs.

Again, comparing blue light projects with BSF is helpful as both the size of debt package and numbers of individual facilities in a typical deal are similar.

“Construction of the fire stations is relatively straightforward, although phasing the programme on an existing operational site can add to the complexity," explains one project finance banker involved in a number of fire and rescue projects. "There is no provision of equipment or ICT."

"As with any sector there are sector specifics you have to get comfortable with. It's not BSF. Fire and rescue authorities don't want to be told by funders that they have got things from BSF because these (projects) are different."

The absence of sample schemes means that bidding costs significantly less than on BSF deals, which require shortlisted teams to work up detailed designs for these facilities. It is a situation that is likely to see the sector increase in popularity among sponsors, lenders and, as a consequence, the public sector as well.

Other projects expected to close in the next twelve months include the North-West Fire & Rescue PFI and a similar project in Gloucestershire. On the police station front, another Gloucestershire scheme should close in 2010, with a larger project in West Yorkshire to follow in 2011.

Most of these deals should be bankable with a club of no more than three lenders and they are remaining popular among sponsors, with several big players putting their hats in the ring.

With a general election in the offing and, barring divine intervention of the sea-parting magnitude, a change of government also in the post, there is a hint of caution to be sounded amidst the back-slapping.

"It won't be any more protected (by a potential change of government) than any other sector," warns the banker. "I believe there is a commitment to future Fire & Rescue PFIs but things could change quite quickly post 2010 election."

That said, the weight of deal flow after a fallow couple of years suggests a sector which is thriving while others struggle to free up their pipeline.