UK will reform PFI, wants pensions onboard

HM Treasury will engage the private sector with a view to reforming the PFI model, making it lower cost and better value for money. The new model will involve greater pension fund investment, fuelling rumours of the imminent launch of a £50bn ‘pension infrastructure fund’.

George Osborne, the UK’s Chancellor of the Exchequer, announced yesterday that the government will reform the Private Finance Initiative (PFI), the country’s standardised procurement process for public-private partnerships.

The announcement is unsurprising, given that PFI has been the target of mounting political opposition since the beginning of this year. Osborne echoed concerns that PFI contracts can be “too costly, inflexible and opaque” and vowed to make the model “lower cost to the taxpayer, offering better value for our investment in public services”. A call for evidence will be issued on December 1, asking the industry to help reform the procurement model.

In a sign that the UK government wants greater pension fund involvement in infrastructure financing, Osborne indicated that a revamped PFI model should be able to “access a wider range of financing sources, including encouraging a stronger role to be played by pension fund investment”.

Rumours have been swirling that the UK government is preparing to unveil a framework to encourage and pool local pension assets of up to £50 billion (€58 billion; $79 billion) to fund its infrastructure plans. This could lead to the creation of a so-called “pension infrastructure fund”, which will be remunerated via energy bills, tolls or rents generated by the various projects it invests in. An announcement could emerge from the government’s November 29 growth review.

The industry has reacted cautiously to Osborne’s announcement. Neil Martin, managing director of infrastructure development for Europe, Middle East and Africa, at Australian developer Lend Lease, said:

“The industry generally accepts there is a need for the reform of PFI and, although the political and economic context has changed, project finance still represents a valid option for the public and private sector. Equity is available for the right projects, but the returns have to be there for the confidence to invest.”

Tony Roper, director of InfraRed Capital Partners, added that “whilst there has been close scrutiny of PFI projects in the UK for their value for money, it is our belief that the government wishes to continue to access private sector capital and expertise in order to deliver public infrastructure. We are working hard to assist our clients wishing to achieve operational savings, as proposed under the UK Treasury guidance issued in July.”

Pension funds are also anxious to see what the government will come up with. A recent survey carried out by schemeXpert.com and Pensions Week, which interviewed 44 pension scheme managers, investment directors and trustees, found they had appetite for investing in UK infrastructure. But the survey also found their enthusiasm was being sapped by the government’s criticism of PFI and resulting uncertainty about how UK infrastructure will be funded in the future.