PFI reform hints at debt and equity role for pensions

Treasury is calling on the private sector to voice its ideas about how the new PFI model should look like. In its call for evidence, government says it would like to see pensions invest in projects at construction phase and possibly provide debt for these deals.

Hot on the heels of UK Chancellor George Osborne’s announcement that government would reform the Private Finance Initiative (PFI), Treasury released a call for evidence late last week asking the private sector for its views on how to improve the procurement model.

PFI, the UK’s standardised procurement process for public-private partnerships, has been under fire from politicians since the year began. In his reform announcement, the Chancellor echoed some of these criticisms, saying PFI contracts can be “too costly, inflexible and opaque” and vowed to make the model “lower cost to the taxpayer”.

Osborne also said he would like to see pension funds play a larger role in funding PFI projects, which the call for evidence confirms. Specifically, Treasury wants to capitalise on market feedback suggesting that “an increasing number of institutional investors [are] interested in earlier involvement in projects, from the development and construction phases”.

The authorities have also noted growing institutional investor appetite for PFI debt funds and say “institutional investors have also indicated an appetite for alternative capital structures for projects that would feature a lower level of project gearing or no gearing, enabling them to invest larger volumes of capital in a project and access both equity and debt like returns”.

The government has recently signed a memorandum of understanding with the National Association of Pension Funds, whose members manage some £800 billion (€931 billion; $1.2 trillion) of assets, and the Pension Protection Fund to “establish a platform to facilitate increased pension fund investment in infrastructure”. According to the National Infrastructure Plan, “the pension infrastructure platform will be wholly owned by pension funds and will allow them to invest in key UK infrastructure assets”.

Acknowledging post-crisis changes to the cost of PFI debt and recognising that regulations like Basel III and Solvency II might diminish the availability of long-term debt, Treasury wants to know what the private sector thinks of “an approach which financed the construction period of projects separately from the operational phase”. 

Perceived excessive equity returns are also addressed in the document, with Treasury wanting to know if a “regulated asset model [would] be more economically efficient than the PFI concession model”. But the government also raises the possibilities of limiting sales of PFI equity on the secondary market and getting a share of the gains from these sales.

Interested parties should get back to Treasury with their suggestions by February 10, 2012. To obtain the call for evidence documentation, please click here