We at last have the long-awaited successor to the private finance initiative - and jolly good it is too. Unfortunately, it falls short on specifics, especially on funding
The construction industry has been virtually unanimous in its support of private finance 2 or PF2 - the long-awaited private finance initiative replacement. On the day of the announcement, I joined in the chorus of praise. After interminable delay, the sense of relief last week when the details on PF2 emerged was extreme.
Now that the warm glow has subsided and the industry has had time to reflect on PF2 in more detail, it is worth asking a few critical questions.
PF2 is a coherent solution to unlocking funding for investment in infrastructure. It is a shame it has taken so long to release to the market and delayed vital infrastructure projects
Crucially, nailing down the detail on the funding mechanism is of paramount importance. Clarity on contracts and timings is also needed.
First let’s focus on the positives - and there is no shortage of things to be pleased about. The formation of a cross-departmental dedicated procurement unit is an excellent move. Lack of leadership has been a significant problem since PFI was kicked into the long grass and this new unit should provide much-needed direction and focus. But let’s hope it is backed up with the right level of resource and experience.
The 18-month bid deadline is another very important step towards driving the new procurement motor of PF2. This measure will help avoid the pitfalls of protracted procurement negotiations which in some cases lasted five years or more under PFI and wasted significant amounts of money.
Measures to increase transparency were absolutely vital. Rebuilding the public’s trust in private finance is fundamental to PF2 and I believe that, by and large, the government has struck the right balance between devising a system acceptable to the public while still being attractive to investors. What is more, the online project approvals tracker - if kept up to date and fully detailed - will potentially be a very useful tool to both public and private sectors.
These are just a few of the highlights. One thing is clear - the government’s extensive consultation with the industry has paid dividends. PF2 is a coherent and well-thought out solution to unlocking funding for investment in infrastructure. It is a shame it has taken so long to release to the market and delayed vital infrastructure projects.
It is in the detail where PF2 is weak in my view. Funding questions in particular remain unresolved. The Treasury talks about an 80:20 debt to equity ratio but there is still no certainty on how the mechanism will work in practice. Questions such as how will pension funds be allowed to compete for schemes remain unanswered and, as a result, the issue of how to de-risk the investment process lacks clarity.
The Treasury talks about an 80:20 debt to equity ratio but there is still no certainty on how the mechanism will work in practice
Information is also light on term lengths. Are we looking at 25-year concessions, as under PFI, or is the government proposing longer terms?
Securing a robust and meaningful pipeline is also a crucial question. It is all well and good for the chancellor to make promises about individual projects to benefit from PF2 when what is needed is a medium to long-term pipeline. Allowing teams to plan resources and funding is critical.
Clarity on what the new form of contracts will look like is also essential to the future of PF2. Helpfully, recent developments with the Priority Schools Building Programme gives us an indication of the shape of things to come. As someone looking closely at the programme, I can happily report that the PSBP draft contract is moving in the right direction.
Details are needed on all the above before the industry moves forward on PF2 but with all the challenges facing the industry now, it is a significant step in the right direction. Although lots of firms are facing cash constraints, there is still plenty of appetite out there for investment in infrastructure - provided the government gets the right framework in place and shows some dynamic leadership.
Stephen Beechey is group investment director and head of education for Wates
3 April 2013
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