UK Treasury curbs PFI profits for private investors

Under new rules that went into effect 1 November, private investors refinancing assets under the UK’s private finance initiative will have to share a larger proportion of the gain with public sector authorities, up to and including 70%.

Private investors participating in infrastructure financing under the UK government’s private finance initiative (PFI) may see reduced profits from refinancing thanks to new rules that took effect over the weekend.

Under the new rules, private investors in all PFI projects that are still in competitive procurement and all projects awarded going forward after 1 November will be required to share more of the gains from project refinancing with public sector authorities, up to and including 70 percent. Previously, such gains were shared 50:50.

The change comes ahead of pledged increases in infrastructure spending by the UK government, which would include building social and transportation infrastructure projects in concert with the private sector under the PFI scheme.

The new rules introduce a graduated gain sharing scheme based on the size of the refinancing. For refinancing gains of less than £1 million, the old 50 percent sharing threshold will apply. For refinancing gains between £1 million and £3 million, public sector authorities will be entitled to receive 60 percent to 70 percent of the gain for any other qualifying refinancings.

The treasury said in a statement that the change “reflects the fact that potential additional refinancing gains may be generated on projects signing in the current market, if credit margins or other terms were subsequently to move significantly towards pre-credit crunch levels”.

Additionally, the new rules also enable the public sector authorities to call for refinancing on a PFI project. Previously, only the private sector partner could control the timing of any refinancing arrangements.

The UK’s PFI allows public sector entities to enter long-term contractual arrangements with private sector companies to design, build, finance and operate infrastructure assets. The program has been in effect since 1992.

There were 500 operational projects with a combined capital value of £57 billion and a present value of future payments amounting to £100 billion, according to a report by the UK House of Commons’ Committee of Public Accounts published 2 September.