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Infrastructure finance rejig can revive market and change the way public and private sectors interact
The Government’s PF2 announcement - part of the Chancellor’s autumn statement last week - heralds some of the most significant reforms we have seen since the introduction of standardisation. If implemented sensibly they could revitalise a market looking for a predictable and deliverable pipeline of projects.
It is over a year since the Government announced its intention to reform PFI and it has not been idle in that time.
The 375-page revised guidance document on the new PF2 structure will replace our well-thumbed copies of SOPC4, the previous bible for PFI transactions. With a few tweaks SOPC4 has been the foundation stone of PFI/PPP projects since early 2007. Along with the aptly-named document ‘A New Approach to Public Private Partnerships’ there is some interesting Christmas reading in store for those involved in the UK infrastructure market. Together with the new government guarantee scheme, we could be on the threshold of a new era of infrastructure development.
Some of the reforms are quite profound and this will prompt a change in the way the private and public sectors approach infrastructure development - and interact more generally.
Many of the fundamental principles of PFI/PPP developed over the past 18 years by both political parties will be retained. However, if there is a common thread to the changes it is the alignment of PF2 with political sensitivities - that is, allowing greater and more transparent sharing of equity upside with the public sector, and giving government greater control over the provision of services.
The reforms are also aimed at attracting new sources of finance on the equity and debt sides, which should be particularly welcomed by most market participants. They include some notable improvements in the way particular risks are to be addressed as well as changes designed to make these projects attractive to a wider range of institutional investors and providers of long-term debt finance - notably absent from the UK infrastructure markets recently.
On the public sector side the first challenge will be to grapple with new guidance and ensure procurement processes and project documents are fit for purpose in the brave new world of PF2. The added threat - posed by a seemingly fixed deadline for appointing preferred bidders before Treasury support is withdrawn from projects - will require documents to be in a bankable form before being released to bidders.
On some early PF2 projects authorities might even wish to ‘road-test’ their documents for deliverability before commencing the formal tender process, to avoid breaching the 18-month deadline.
On the private sector side there are plenty of challenges to be met. Most leading PPP developers and funders will be examining these reforms to determine how to realign their businesses to take advantage of opportunities and address the potential threats.
We may even see a new set of faces at the negotiating table - the only question is whether these institutions are now willing to take on the upfront project development and construction risk.