Private Finance Initiative - Treasury Contents

Written evidence submitted by Equility Capital Ltd

The evidence presented herein shows that as much as £62 billion of tax-payers money has been wasted on PFI, due solely and exclusively to the flawed perception that we must keep infrastructure funding off-balance sheet.

We also demonstrate that the Capital Lease Infrastructure Program (CLIP) funding option will immediately introduce savings on cost-of-finance in the order of 50%+ (from current 12% to 15% to 6% or less) with no effect on operations and maintenance. Also, with the ability to produce surplus funds that can be re-directed into social infrastructure.

Before moving forward with this Paper, it is important to understand that Equility Capital works directly with an investment management company for a consortium of financial institutions. These are comprised principally of life companies, pension funds, large investment banks and sovereign wealth funds.

In short the CLIP process described herein is resourced with what can probably be regarded as one of the world's largest financial resources focused exclusively on infrastructure funding.

However, the investment business of the investors is their private concern. Therefore, Equility Capital has arranged that selected names of the financial institutions participating in this consortium will be given only to Ministers of buying departments and members of the Treasury Select Committee who arrange a conference call direct with the US-based investment manager.


This Evidence Paper is presented by Equility Capital Ltd, an alternative capital brokerage firm established in 2009 in response to the new capital and financing structures that began to emerge in the wake of the global financial meltdown. We now work with a wide range of hedge funds, asset/investment/wealth managers who are introducing innovative financing structures into the market. These new structures fall under the general heading of "Alternative Capital".

Equility Capital is widely regarded as the leading global brand in this rapidly emerging market. Further information on our company is available at

This evidence paper has been produced on the advice of Jesse Norman MP, a member of the Commons Treasury Select Committee, after a meeting held in his Hereford constituency office on 10 June.


As Eric Pickles, Secretary of State for Communities and Local Government, remarked soon after the coalition took office, the UK has relied on the private sector to provide its key infrastructure needs for hundreds of years. In more recent years this has translated into PFI and, even more recently DBFO. Both these structures are driven by the perceived need to assign all risk for the project to the private sector, in so doing keeping it off the national balance sheet.

The cost of this approach is already well known and is the driver behind the Committee's call for PFI Evidence Papers.

Equility Capital takes the position that the continuing requirement to remove all risk from the balance sheet is anachronistic when set against today's financing and underwriting options. While the rest of the world is confidently embracing new funding structures, and powering ahead with their infrastructure programmes, the UK remains trapped in the misplaced, inward looking (and obscenely expensive) belief that it must assign all risk to the private sector to reduce liability on the balance sheet.

This approach is obsolete. Using new financing structures and state of the art construction programme management techniques, now widely used around the rest of the world, the UK can have all the infrastructure it needs by employing lease-based funding programmes. Yes, it will appear on the balance sheet but, as the funding is lease based, so will the asset.

Sophisticated and proven risk-mitigation programmes and 21st century project management methods also remove risk by 99%, the remaining 1% being tectonic events that would destroy the entire, global political and economic firmament.


To starkly illustrate the obscene amount of money that has been wasted on PFI, and is due to continue to be wasted on DBFO, driven simply by the balance sheet/risk assignment fixation, is starkly presented in the following comparative figures for existing PFI programs, compared to costs that WOULD have been incurred had the Capital Lease Infrastructure Programme (CLIP) been used:


Source: PartnershipsUK
(May 2011)

RegionNo. of Projects Value


East of England472,838
East Midlands602,494
North East471,992
North West814,659
Northern Ireland351,016
South East817,509
South West623,524
West Midlands583,810
Yorks & Humber67 2,726
83866,887 (Principal)
Monthly interest @ 12%/20 years 736(8,832pa)
Monthly interest @ 6%/20 years 479(5,742pa)
Monthly saving248 (3,090pa)
Cost of funds saving over 20 years 61,800

£62 billion of waste to satisfy an accounting process

This table shows that, had CLIP been the financing source for all current PFI projects, the saving to the country would by now be in the order of £61.8bn. A saving we have not achieved simply and exclusively because we have not been able to overcome the fixation on the balance sheet/risk assignment dynamic.

ALSO, and equally important, at the end of the lease period the asset reverts in its entirety to the borrower. That can be NHS, DfT, a local authority or any other government entity.


It is proposed that CLIP is given a different balance sheet treatment to traditional PFI or DBFO social and economic infrastructure funding programmes.

CLIP relies on the credit rating of the borrower, AAA from all agencies for the UK, and from the funders' standpoint the risk will rest 100% with HM Government. This is simply a requirement of the investors in order for the project to secure the significantly lower cost of funds. They are required to invest in investment grade rated entities in order to provide maximum protection and long-term, predictable returns for their pensioners and policyholders.

However whilst the investors will rely on the UK's AAA rating, over the past five to 10 years, project management processes have advanced significantly and to the point where risk is now dispersed and diluted across the supply chain for the entire project. In short, risk at all stages of construction is assigned to any one of the growing range of insurance companies and underwriters who provide a huge diversity of insurance wraps and performance bonds.

The ACTUAL risk to HM Government is, in reality, limited to force majeure that would, in any event, undermine the entire global financial and political firmament. And even these 'Acts of God' can be covered with the insurance wraps that are now available. In order to address the balance sheet treatment of CLIP funding for UK infrastructure it is therefore essential to understand the REAL as opposed to PERCEIVED risk of applying the funding to the balance sheet.

The points therefore that are addressed in this proposal are:

1.  Preserving our AAA rating.

2.   Balance sheet process for CLIP funding.

3.   Stabilizing overall infrastructure costs.

1.   Preserving our AAA rating

Even though PFI and DBFO funded infrastructure projects are off-balance sheet, the credit rating agencies are fully aware of them and their impact on our economic stability. Actually having them off-balance sheet makes not the slightest difference to our rating.

Currently, in order to assign risk to the private sector through PFI/DBFO we are paying in the order of 12% to 15% when, in fact, contractors are off-setting risk to their own underwriters (and including the charge for that in their cost of funds).

We propose that CLIP funded infrastructure projects are actually posted to the balance sheet with an indicative annotation thus:

All Risks Private Sector Underwritten (ARPSU)*

Defined as (proposed):

All construction, performance and other risks relating to the financial stability or performance of this project has been underwritten by private sector insurers.

*The above definition will, undoubtedly, become more detailed and specific should the Committee decide to adopt these proposals. They are shown here only for illustrative purposes.

On the opposite side of the balance sheet the assets to which these ARPSU costs refer can be shown.

In this way, exactly the same protections enjoyed by the private sector, at a cost to us of between 12% and 15% can be assigned to the taxpayer at a much reduced cost of (currently) 5.5% to 6%.

However, a key part of the process will be to advise the UK analysts at Moody's, S&P and Fitch that this new infrastructure accounting process is being adopted and why it is being done. This should be done not by a simple notification, but by presenting all aspects of this policy to them face-to-face. The agencies will respond positively if it is seen that steps are being taken to reduce the financing costs of our much needed infrastructure, with perceived risks mitigated by 99%.

2.  Balance sheet process for CLIP funding

In order for this to be acceptable to the rating agencies and, indeed, to HM Government itself, the process for applying CLIP funding to the balance sheet needs to be rigorous and based on proven best project management practice.

Essentially this hinges on the following:

—  Each contract in the supply chain is shown to be underwritten for financial, material, performance and all other factors.

—  The insurance/underwriters must be acceptable to the project manager and the relevant government purchasing department. They will need to demonstrate financial stability (probably based on credit agency rating) with proven track record in providing the relevant insurance wraps to infrastructure projects.

—  The project managers themselves are experienced and can demonstrate acceptable financial stability.

As noted above with our ARPSU proposal we realise that these are only headline, indicative requirements. However, Equility Capital has close relationships with a number of leading, global infrastructure project management firms. Working with them as well as directly with the fund manager, we are positioned to produce the full process for these CLIP funding proposals within a short time. An estimated three months.

It may be required that a small CLIP transaction processing team will be required at HM Treasury, in which case we can assign liaison staff working directly with the fund manager.

3.  Stabilizing overall infrastructure costs

We fully appreciate that incurring any additional liability on the balance sheet, even within the proposals we have set forth here, might be seen as potentially hazardous. The third stage of our proposal is, therefore, that for every NEW project financed through CLIP, we select an existing PFI project (or a number of them) with an equivalent outstanding value for RE-FINANCE.

In this way a new project financed at, say, 6%, can be off-set against an existing (or number of) PFI project(s) with an equivalent principal value but with the cost of finance reduced from, say, 12% to 6%. In this way, we are stabilizing our infrastructure costs.

It must also be kept in mind that under the CLIP process, all revenues received (after lease and operating costs) are retained by the borrowing entity. That might be an NHS trust, bridge, railway or any other asset that is currently seeing those revenues being dispersed amongst contractors and financiers. These operating profits can be re-directed into social infrastructure.

Naturally unpicking PFI agreements, even though they may have opt-out clauses, will take significantly longer than arranging new CLIP funded projects. These can take anywhere between 45 and 120 days, against a re-financing that could take anywhere between six and 12 months.

For those PFI deals selected for re-financing, Equility Capital can assign a liaison to ensure that all the funder's requirements are met and coordinated right through to the point of closing.

June 2011

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Prepared 10 August 2011