Osbourne unveils PFI successor PF2

After a long-running review of what George Osborne terms the “discredited” Private Finance Initiative (PFI), the UK Chancellor today unveiled PFI’s successor – the so-called Private Finance 2 (PF2) procurement framework.

The aptly named PF2 is, in many ways, a refinement of PFI, designed to be more transparent and better value-for-money for taxpayers. On the transparency side, private companies involved in PF2 will, for the first time, have to disclose annual profits from these deals, with the government to keep a running tally of the liabilities generated by PF2 deals, which will still be recorded off-balance sheet. 

Importantly, companies will continue to be able to trade PF2 stakes in the secondary market, although Treasury at one point reportedly considered penalising investors who sold out of PF2 contracts early, according to BBC business editor Robert Preston.

To ensure taxpayers get a share of PF2 profits, the public sector will take equity stakes in PF2 projects and get a seat at board level in the project companies. Contracts will also be less geared, with 20 percent to 25 percent of PF2 project costs to be funded with equity. In contrast, PFI projects were usually geared at a 90/10 debt-to-equity ratio.

The novelty, though, is that PF2 projects will effectively be funded using three distinct sources of equity: developer equity, public sector equity – able to cover up to 49 percent of total project equity – and what the government is calling “third party equity”. The latter will be determined following selection of a preferred bidder for a PF2 contract and will be procured through a funding competition. The target is institutional investor equity. 

Regarding debt financing, Treasury said “the financing structure for PF2 will be designed to enable access to long-term debt finance, and in particular, the capital markets”. It did not, however, give details on how this will be achieved.

In a bid to avoid damaging headlines about light bulbs that cost hundreds of pounds to change, the government is introducing flexible soft facilities management contracts, meaning PF2 contracts will be able to change service providers at any point during the contract and engage cheaper options.

Also on the value-for-money side of the equation, procurement times for PF2 deals can last no longer than 18 months. A fairly frequent PFI criticism was that tenders took too long and were excessively costly compared with public-private partnership procurement in Continental Europe.

PF2’s unveiling is accompanied by a pipeline of projects, the first of which will come courtesy of the £1.75 billion (€2.15 billion; $2.82 billion) priority schools building programme, which will seek to refurbish some 219 schools across the UK. New investments of up to £325 million in the healthcare sector might also be procured under PF2, the government said.

In related PFI/PF2 news, Chancellor Osborne also announced that his government is on track to achieve savings of up to £2.5 billion on existing PFI contracts. The government has already managed to achieve savings of £1.5 billion, mostly through renegotiating facilities management contracts, and has identified a further £1 billion in cuts.

According to the Office for National Statistics PFI liabilities amount to £144 billion, in present value terms, spread across more than 700 PFI projects.