11 November 2002
11 June 2014
21 October 2013
13 May 2014
19 August 2014
DKF and Wierzbowski Eversheds defence and security networking meeting: discussion of the new Offset Act
22 July 2014
This criticism is as a result of two events. First, the Labour Party Conference, at which there was a vote against future PFI projects, and secondly the publicity arising from the share prices of PFI-related companies suffering in recent weeks.
It is worth exploring the reasons for the latest batch of criticism. Observers of the PFI sector have already noted the inherent contradiction: if PFI is such a poor deal for the public sector (as argued at the Labour Party Conference by many of the union representatives present), then how can it also be such a bad deal for the private sector that share prices have been hit in the way they have been? The answer, I think, lies in a combination of the age of the PFI process (officially around for 10 years, but the process is not getting quicker and cheaper in the way that it should), accounting changes and the reaction of the equity markets. Recent marking down of PFI-related shares is not indicative of PFI deals being bad for the private sector, but really a consequence of other events with short-term effects.
PFI bid costs have been a worry for a decade now. The two reviews by Sir Malcolm Bates into PFI (1997 and 1999) concluded that, among other things, bid costs were too high. This was, he said, partly as a result of the lack of public sector project skills, partly due to the lack of standard terms and partly because of a lack of control of deal-flow by the public sector. Since then, changes have been made to the process, but bid costs are still too high and deals are still taking too long to close. The creation of the Treasury Taskforce and its successor Partnerships UK has assisted in the process in certain sectors, but to date their existence has not alleviated the bid cost problem as a whole. After some improvement, recently, if anything, the problem appears to have worsened. It is fair to say that some cynicism is now setting in on both sides as to whether the process will ever really improve.
Accounting changes have made the longstanding bid cost issue very topical. The Urgent Issues Task Force Abstract 34, published by the Accounting Standards Board on 21 May this year, had a dramatic effect on the PFI industry. This was due to a combination of its timing and its effect. Abstract 34 required many companies with strong PFI businesses to restate their earlier year's profit figures and reduce those predicted for the current year. Its introduction was unfortunately timed, in that analysts were still trying to understand what Enron meant for markets in the UK and so were looking with suspicion at businesses using special purpose vehicles (SPVs). The effect of Abstract 34 is that companies must charge as expenses in their profit and loss accounts any costs incurred before it is "virtually certain" that a PFI contract will be signed (something not done widely). The effect of restating previous years' profits in a bear market has been predictable. Having said that, since bid costs will be recovered (on successful bids) through the unitary charge and be repaid from the senior debt at financial close and reimbursed to consortium members, the market reaction resulting from Abstract 34 may have been overdone.
PFI, therefore, is of concern to the public sector for the same reasons as always. The effect of the market on PFI related stocks is new, but more a problem of timing than illustrative of a wider malaise. Bid costs are coming down in many PFI sectors, but slowly (and those who want to point the finger at the legal profession should be aware that legal fees only account for a small percentage, less than 10 per cent as a rule, of the bid costs of a consortium).
PFI is a long-term process. Its benefits and difficulties will be seen over the longer term and - although tempting - there is little virtue in drawing conclusions from resolutions at party conferences or the performance of the stock market, whether contradictory or not.