No miracle cure for PFI

PF2 has some neat innovations, but still faces a tough baptism.

It’s easy to be sceptical about Private Finance mark 2 (PF2), the UK coalition government’s new public-private partnership (PPP) model. Was it really necessary, after all, to put social infrastructure on hold for so long and then come up with a model that looks like merely a slightly refined version of its PFI predecessor? What did all the angry criticism of PFI from some government ministers amount to? Surely these ministers expected the surgeon’s knife rather than a quick nip and tuck?

But let’s lay that to one side. In the rather grand surroundings of Glazier’s Hall beside the River Thames, Jo Fox, head of PPP policy at Treasury unit Infrastructure UK, delivered a defence of PF2 to the Westminster Business Forum – and a solid one it was too. She began by acknowledging that PFI had, in general, been a great success – helping projects to be delivered in a cost-efficient manner and with the benefit of skilled long-term stewardship of assets. She also made a strong case for why certain things in relation to the model had to change.

For example, public concern over windfall equity profits may not have been entirely justified – but the move to provide government (and taxpayer) with a minority equity stake under PF2 seems both eminently reasonable and a shrewd method of detoxification. Nor can anyone justifiably argue with the demand for greater transparency, including the move from “off” to “on” balance sheet. PFI was only ever supposed to be one procurement option, not the only game in town – the fact that it benefitted from the perverse incentive of off-balance treatment was effectively an anti-competitive market distortion.

There are further reasons to applaud the Treasury’s PPP policy team. The introduction of post-preferred bidder equity competitions is a clever move, designed to lure capital from investors put off by development risk. Attracting institutional investment is also front of mind – though recent experience has suggested that this may be easier said than done. Fox’s reference to M&G’s involvement in the Alder Hey hospital PFI was less than convincing (M&G having been involved in the project loan market pretty much throughout PFI’s two decades, so hardly a breakthrough).

Perhaps the most laudable ambition to be found in the new model is the near-halving of procurement times. Fox produced a killer stat – namely, that in 20 years of PFI procurement the length of processes have merely inched down from an average 34 months to between 32 and 33 months. Some aspects of the Treasury response are entirely sensible if unflashy – centralised rather than local procurement where appropriate; a thorough review of skills and depth of resource on the public sector side of the procurement table.

But where it gets really eye-catching is in introducing an 18 month procurement limit which, if exceeded, renders the procurement invalid. Where this gets tricky is in the form of a compensation scheme for affected bidders which may in certain circumstances provide a perverse incentive to try and push processes beyond 18 months. Fox said the compensation scheme is still under consideration – no doubt a lot of collective grey matter is being expended on the issue. Her assurance that the scheme is very unlikely to be put to the test, since in reality she would expect a maximum 15-month process, may have persuaded some in the room but not others.

In sum, PF2 represents a well-thought-out, well-meaning collection of small improvements. What it doesn’t necessarily represent, however, is a panacea for the drying up of deal flow that began to take effect when PFI was placed on the shelf. At the end of her presentation, Fox listed upcoming deal flow that would put PF2 to the test. At the risk of sounding sceptical again, it was not a long list.