Fighting back

Innisfree’s David Metter made it clear to Parliament that the PFI industry would not accept any talk of rebates if what is really meant by ‘rebate’ is a disguised haircut to investor returns.

The UK government’s ongoing debate about the perceived costs and excessive profits derived from the country’s private finance initiative (PFI) programme by the private sector has often been heated. 

But in a recent hearing conducted by Parliament’s spending watchdog, it had a defining ‘gloves are off’ type moment, when chairwoman and Labour MP Margaret Hodge presented David Metter, the head of UK infrastructure fund Innisfree and trade body PPP Forum, with the following barb, after welcoming him to the hearing:

“How do you justify what appears to all of us to be ripping off the taxpayer?”

The pointed question referred to the excessive profits that MPs believe the PFI industry is deriving from the sale of equity stakes in completed projects. Private sector profit sharing was the context of the whole hearing, in fact. The tone, abundantly clear from the above, was one of open hostility toward the PFI industry. 

Which is why it was important to hear Metter – whose voice has some weight in the PFI industry on account of his chairmanship of the PPP Forum, an industry body that counts many of the sector’s leading banks, advisory bodies, developers and infrastructure funds as members – set the record straight on the thorny issue of rebates that would cut into contractually agreed returns.

“We have had discussions [on this with Treasury], but we have said no,” he answered, before moving on to outline the obvious dangers of this approach:

“[PFI financing] is no different to an investor buying a gilt: would you go to gilt investors and say, ‘Can you take a little bit less interest to help the British taxpayer?’ If you do it it’s called a haircut, and everybody is terrified of haircuts. If we go to investors and say, ‘This rebate they are talking about is, in fact, a haircut, a rescheduling of your investment’, it would be very bad for UK credibility.”

Needless to say, Metter did not get an answer to his question. Nor did he receive any acknowledgement when he tried to dispel many of the watchdog’s doubts about the perceived costliness of PFI. In another defining exchange, Metter explained that the weighted average cost of capital for pre-2008 PFIs was 5.7 percent, or 2.2 percent above government gilts, which stood at 3.5 percent at the time.

This prompted chairwoman Hodge to immediately counter that bank margins since 2008 have gone dramatically up, placing the cost of new PFI projects at between 6 percent and 7 percent, angrily accusing Metter :

“Yes, so you took a pre-2008 figure, because it suited the purpose of your argument rather than reflecting the reality”. To which he countered with the obvious: “…Most of the projects are pre-2008. Since 2008 there has been a real rundown in the number of new PFI projects that have been financed.”

In fact, if Parliament and government only wanted a rebate for PFI projects closed since 2008, the PFI industry would probably gladly shrug its shoulders and write them a cheque, such has been the trickle of projects since then.

We could add many similar exchanges from last week’s hearing, but the real point is this: the former Labour government entered into agreements with several investors to build some 700 infrastructure projects, many of them social infrastructure, like schools and hospitals.

For the vast majority of them, it paid 2.2 percent above the gilt rate for contracts that provided whole-life funding and de-risked the construction and maintenance of these assets. The current coalition government now wishes either that fewer schools and hospitals were built, or would like some of its money back because times are tough.

Since the UK still needs to still build a tremendous amount of new infrastructure which it can’t afford from the public purse, it will have to devise a new model to attract the private sector. Of this new model, you can be sure of three things:  it won’t be called PFI; it will be better than PFI; and somebody will be writing about how costly Parliament finds it and how it can claw some money back from it 10 years after first being applied.