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 www.equilitycapital.com.
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
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
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)
COMPLETED PFI PROJECTS
|Region||No. of Projects
|East of England||47||2,838
|Yorks & Humber||67
|Monthly interest @ 12%/20 years||
|Monthly interest @ 6%/20 years||
|Cost of funds saving over 20 years ||
£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
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
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:
contract in the supply chain is shown to be underwritten for financial,
material, performance and all other factors.
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.
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
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.