Memorandum by The International Project
Finance Association (IPFA)
The International Project Finance Association
(IPFA) is delighted, on behalf of its members, to prepare and
deliver this submission to the Economic Affairs Committee of The
House of Lords in response to the call for evidence in preparation
for an inquiry on Private Finance Projects and off-balance
IPFA was established in London in 1998 as a
not-for-profit trade organisation and operates as a company limited
by guarantee. IPFA is the only international and independent Association
dedicated to promoting and representing the interests of private
sector companies involved in project finance and Public Private
Partnerships (PPPs) throughout the world.
IPFA currently has in excess of 360 members,
comprising companies and organisations drawn from the full range
of the project finance industry, including project sponsors, contractors,
lawyers, financial advisors banks, consultants, accountants, insurers
and equity investors. IPFA also provides public sector members
the opportunity to become honorary or observer members. A large
number of multilateral organisations and government agencies also
regularly attend IPFA meetings.
IPFA believes that PPPs and the Private Finance
Initiative (PFI) have played an important role in the delivery
of major infrastructure projects in the United Kingdom over the
past 15 years.
Question 1: How should the cost and benefits
of Private Finance projects be assessed? What discount rate should
be used in comparing Private Finance with conventional public
procurement? Are the current procurement procedures satisfactory?
Is enough information disclosed on Private Finance projects fully
to assess whether the taxpayer is getting value for money?
IPFA recognises that the use of "Private
Finance" (ie PFI/PPP) is only one part of the overall toolkit
of procurement options open to UK Government.
IPFA appreciates that enduring factors such
as "affordability" and "value for money" are
critical questions that require rigorous assessment on a project-by-project
basis by Government when determining whether and how to procure
any project, including whether it should proceed with a Private
Finance component, rather than procured by traditional means.
The toolkits by which Government assesses the
cost of Private Finance projects are well established, in particular,
the Public Sector Comparator (PSC).
The PSC approach has had limitations, including the difficulties
and uncertainty of costing any public sector solution, given the
relative lack of quality historic data on the cost and performance
of traditional procurements. The level and quality of information
held on Private Finance projects is recognised as being much greater
than that held on the performance of traditional procurements.
Our members have also commented that the rigour
of the "value for money" assessments of early PFI projects
has been lost by the commoditised nature of some of the larger
PFI procurement programmes. There has been a trade-off between
the benefits of standardisation and the additional innovation
allowed by more flexible contracting methods.
Whilst there have been a number of studies undertaken
to assess the costs of Private Finance projects (including more
than 60 reviews by the National Audit Office (NAO)), there has
been little empirical work undertaken on the wider benefits of
Private Finance projects.
There has also been little or no study on the costs of traditional
procurement, again, largely due to the lack of data available.
It is clearly difficult to establish an appropriate criterion
to determine benefits. Our members have indicated that it would
be valuable for further work to be commissioned on PFI/PPP benefits
realisation through post procurement reviews, and in particular,
on the costs of delivery of traditionally procured projects in
order to provide a suitable basis for true comparison.
In terms of discount rate, our private sector
members did not have a particular view, other than that it is
for government to determine their true cost of borrowing (including
the cost of risks borne by the taxpayer) for use in evaluating
procurement options. The system established in the Green Book
is currently applied equally to all procurements within government.
Our members expressed a number of concerns relating
to the framework for procurement of Private Finance projects.
In particular, a number of our international members, who have
experience in bidding and operating projects across Europe, have
indicated that the United Kingdom's approach to the implementation
of the "competitive dialogue"' procedure
is far more onerous than the approaches adopted by other member
During the recent period of economic unrest,
the potential protracted time period for PFI/PPP procurement processes
have been highlighted. In contrast to the Competitive Dialogue
procedure, one of our members has suggested using the Restricted
Procedure to accelerate the time to market of major infrastructure
Whilst not suitable in all circumstances, this procurement mechanism
could be used in limited circumstances (where Competitive Dialogue
is not prescribed by legislation) as an alternative and more efficient
procurement route for Private Finance projects.
Finally, our members recommended that further
efforts are made to ensure the retention of public sector procurement
teams in the implementation/construction phase of Private Finance
projects, to increase the effectiveness of government contract
management, encourage information sharing, improve training of
project staff, and create accessible knowledge systems to capture
examples of "good" and "poor" procurement
Question 2: How does the performance (eg
cost, delivery dates and service quality) of schools, hospitals,
prisons, roads and other projects operated under private finance
compare to those which were traditionally procured?
It is generally acknowledged that there is a
lack of information/data on the performance of conventionally
In particular, there has been little, if any, data collected on
outcomes of traditional procurement.
In stark contrast, there have been numerous
reports and studies commissioned/written by HM Treasury and the
NAO, which have highlighted the benefits of Private Finance projects
over traditionally procured projects.
The often cited benefits of Private Finance
Projects over those procured traditionally relate to the key risks
transferred to the private sector, in particular:
(i) construction risk; and
(ii) completion risk to time and cost.
There is an overwhelming amount of evidence
to substantiate that Private Finance projects are being delivered
on time and on budget.
The Mott MacDonald Report (cited above) and
various NAO Reports
noted significant deficiencies in the traditional procurement
methodology. In addition, the 2001 NAO Report on Modernising
found significant deficiencies in the traditional procurement
The Mott MacDonald Report, Review of Large
Public Procurement in the UK published in July 2002 examined
50 projects procured traditionally over a 20 year period (each
with a capital value in excess of £40 million in 2001 prices),
all of the projects had been delivered late and over budget.
The 2003 NAO Report on PFI Construction Performance
found that only 22% of PFI procured projects had exceeded the
cost expected by the public sector on contract award, most of
these cost overruns being due to variations demanded by public
sector sponsors. In contrast, the NAO noted previous survey that
over 70% of buildings delivered to the public sector procured
conventionally were over budget.
Further, the 2003 NAO Report found that under
PFI only 24% of public building projects had been delivered late,
in contrast to data on traditional procurement which found that
70% of building projects had been delivered late.
A key feature of Private Finance projects is
that the whole-life of the project is assessed, including long-term
maintenance. A number of our members have indicated that this
rigour ensures that tangible benefits can be achieved through
design and asset quality, incentivised through the long-term nature
of the contracted payments made possible by the involvement of
Private Finance. This perspective also encourages a focus on service
delivery and long-term performance. For example, repairs and maintenance
requirements are planned at the outset with allocated long-term
budgets and consequently assets and services are maintained at
a predetermined level over the life of the project.
Question 3: Is there significant risk transfer
to the private sector or is it more apparent than real?
Our members maintain that, in most Private Finance
projects, there is significant risk transfer to the private sector.
To date, there has been little, if any, work undertaken on risk
identification and analysis in traditional procurement, as the
public sector retains most, if not all, of the major risks associated
with a traditional procurement.
As part of the rigour of the initial investment
decision, public sector procurement authorities must assess and
evaluate the risks associated with both traditional procurement
and Private Finance options and, where necessary, analyse the
financial consequences of each risk and how such risk should be
Our members have pointed out that risk transfer
is certainly "real" from their perspective. There have
been a limited number of high profile events at both a corporate
and project level in the PFI industry where the private sector
finance has been used to absorb significant risks and financial
exposure to save the projects from performance failure. At an
industry level, there have been a number of corporate failures
(ie Jarvis, Ballast) where individual Private Finance projects
were largely unaffected due to the intervention (at the cost of
the private sector) of equity investors and senior debt providers
undertaking restructuring arrangements. There are also a number
of Private Finance projects that have been delivered late, where
the private sector has absorbed the financial consequences of
late delivery, technical failure and cost overruns. In all such
cases the costs and related losses would have been borne by the
public sector in traditional procurements.
Where failure has arisen due to the realisation
of risks retained by the private sector, this has led significant
losses to shareholders, private sector contractors and senior
lenders (ie Royal Armouries Museum in Leeds, the National Physical
Laboratory at Teddington and Croydon Tramlink).
Question 4: How effective and costly has
it been to monitor the private sector providers' performance and
quality of service in Private Finance projects in comparison with
There is little monitoring of the performance
of traditional public sector procurement projects, particularly
over the asset life. In contrast, there is extensive monitoring
of the private sector's performance during both construction and
the operational phase of a Private Finance project. It is usual
under a Private Finance project to include a performance and payment
mechanism to ensure the private sector is incentivised to perform
to a required standard throughout the concession period (which
may be 30 years or more). Extensive monitoring and information
provision obligations are included in such contracts, both as
requirements of debt funders and procuring authorities.
Where a private sector service provider is performing
poorly, the public sector may be entitled to apply payment deductions.
The public sector is, therefore, incentivised to monitor the performance
of the Private Finance project and, where appropriate, make financial
deductions for such poor performance. The cost of monitoring the
performance of private sector providers is generally already built
into the financial proposal submitted by the private sector as
part of their own operational plan and as a requirement of their
Question 5: When the basis of a Private Finance
contract needs to be altered post procurement because of changing
client needsfor example, a bigger jail is required due
to a larger than expected prison populationhas this proved
problematic compared to projects under traditional procurement?
What has been the experience of PFI projects that have reverted
to the public sector?
The evidence suggests that Private Finance contracts
provide sufficient flexibility for the public sector end-users
and sponsors. In particular, the NAO Report on Making Changes
in Operational PFI Projects highlighted that PFI deals provided
sufficient flexibility, ensured changes were handled in a timely
manner, change processes were handled well and PFI changes achieved
better value for money than conventionally outsourced work.
The overwhelming message from our members is
that Private Finance contracts do force the public sector procurement
team to carefully assess their operational needs prior to embarking
on procurement of a long-term Private Finance contract. The Private
Finance approach has driven a new discipline into public sector
procurement bodies in undertaking investment appraisals and business
case/planning to ensure the long-term benefits of the Private
Finance contract are truly realised.
This represents, a significant change in the
behaviour by procurement officials, one of the early objectives
Notwithstanding this, where there is a need
for a contract variation, there is little difference between a
Private Finance contract and a project procured through a traditional
Our members experience has been that changes/variations
to Private Finance contracts work best are most efficiently procured
(in terms of both time and cost) where funding for the change
is sourced from the public sector (just as with changes to a traditionally
procured project), rather than seeking third party additional
finance into the project. Where this is the case, there is little
difference in terms of timing for implementation between a significant
capital change and a small works change.
For changes within a Private Finance contract,
the parties will have already negotiated and agreed a change procedure
for implementation and adoption of change/variations. There is
no equivalent regime within traditional procurement.
Question 6: How should future payments by
the Government under existing Private Finance contracts be recorded
in public sector accounts? Is risk transfer an appropriate test?
Should all such liabilities be included in the national debt?
Should they be accounted for separately from government debt?
How much does the public sector accounting treatment of capital
and revenue aspects of projects?
We believe that key driver for Private Finance
should be the definition and demonstration of "value for
money", rather than whether or not a particular project is
included within the public sector balance sheet. However, our
members do appreciate that from a Government perspective, accounting
treatment is a concern, in particular where an investment decision
is impacted by constraints on capital affordability.
The UK Government statistical reporting obligations
within Europe are fulfilled through the National Accounts, prepared
under the European System of Accounts 1995 (ESA 95). Budgeting
for PFI/PPP projects is also based on ESA 95, in line with the
National Accounts. This approach is welcomed, as it places the
UK on an equal footing with other EU Member States (it has been
the basis used by other European member states for over 10 years).
The harmonisation of statistical reporting and
budget treatment for public sector accounts amongst EU Member
States is increasingly important to our members, particularly
for those who transact across the European Union and where the
United Kingdom could be seen to be disadvantaged, if other Member
States were working under a different system to the UK.
Separately, the UK Government has adopted International
Financial Reporting Standards (IFRS) for accounting purposes.
This has provided greater transparency of the governments future
obligations, without disadvantaging the UK in comparison to other
EU Member States.
Question 7: Would public sector investment in
the last decade have been lower without Private Finance? If so,
by how much?
There is much evidence to suggest that Private
Finance has played a role in the delivery of significant investment
in UK public service assets over the last decade. The HM Treasury
report, PFI: Strengthening Long Term Partnerships recognises
that UK's public services were suffering from a legacy of under-investment,
particularly when compared to other G7 countries between 1970-1990.
The HM Treasury report also highlights in 1997, the backlog of
in schools maintenance was around £7 billion, NHS buildings
maintenance was over £3 billion.
There are now over 700 PFI projects in currently
in operation in the United Kingdom,
including over 220 health sector projects, over 160 education
projects and over 60 transport projects.
However, projects involving Private Finance
represent only a portion of the procurement routes for the public
sector to adopt to deliver and manage public services. At present,
it is estimated that PFI accounts for only around 10 to 15% of
the total investment in public services.
Question 8: How much impact has the financial
crisis had on launching new Private Finance projects? Is the crisis
likely to have a permanent effect on the Private Finance Market?
There is little doubt that the recent financial
crisis has had an impact on Private Finance projects.
Due in part to a number of consolidations within lenders to the
Private Finance market and, in part, to the economic conditions,
the number of senior debt providers who are willing to lend long-term
(ie over 10 year tenor), has contracted, probably by half.
In addition, a number of international financial institutions
have withdrawn from the UK Private Finance market, adopting a
strategy to advance funds within their own domestic market. The
reduction in the number of project finance lenders has also an
impact upon pricing for senior debt, leading to increased lending
margins being charged to project borrowers.
There is consequently less, or no, activity,
within the international Project Finance syndication market, which
acted as an important conduit for liquidity in the sector. This,
coupled with the withdrawal from the market of monoline insurance
providers (which provided bidders with an alternative long-term
source of finance from capital markets), has meant that the overall
financing capacity and liquidity within the Project Finance market
However, the lack of availability of credit
finance is a global issue affecting all segments of the market
including housing development, corporate mergers and acquisition
activity and Private Finance projects.
The overwhelming feedback is also that the senior
debt market for Private Finance projects is merely acting as a
short term constraint, and although some deals have been delayed
(as in all areas of the market), there has been a gradual increase
in activity. There have been a number of notable deals (including
the M25 widening transaction) that have reached financial close
during the crisis, without the need for UK Government funding.
Our members have adapted to the new challenges.
The Project Finance market has proved resilient in the past and
there are no reasons why it should not bounce back as the financial
markets improve and countries move out of global recession. Indeed,
some banks have noted that Project Finance deals are well-structured
generally and are performing well, notwithstanding the crisis.
Our members do not believe, however, there will
be a return to the over-supply of senior debt within the Project
Finance market (as in the mortgage and structured finance markets),
as witnessed in 2006-07.
Question 9: Are there realistic alternative
roles for private finance than the current PFI-type private finance
models? Should the UK be aiming for more diversity in private
finance models? Would a national infrastructure bank (such as
the proposed Dodd-Hagel NIB in the US) add any value in the UK?
Should the public sector have a more hands-on role in financing
PFI is only one of a number of alternative models
for the introduction of Private Finance into public procurement.
Indeed, the UK Government itself has a number of variants which
could be categorised as PPPs, such as the use of joint ventures
delivery vehicles, public sector outsourcing models (eg shared
services models) and public service operating contracts.
The UK has already embraced a diverse range
of Private Finance procurement models.
It is anticipated that in future the delivery of public services
by the private sector will require an even greater mix of long-term
and short-term contracts, including joint venture models and public
sector outsourcing, in addition to PFI procurement.
For the delivery of infrastructure projects
that require little, if any, ongoing service/maintenance, a number
of our members cited the Design Build Finance and Transfer model
(DBFT) which was successfully deployed on the Evergreen II rail
project (a rail procurement providing for the construction of
two new platforms at Marylebone Station, London, signalling work,
and some track realignment at Beaconsfield). The model works particularly
well where the need for on-going services is limited, but the
public sector still wishes to achieve significant risk transfer
and the involvement of Private Finance during the construction
phase and there is unlikely to be a need for longer-term finance
within the project.
In this context, we have noted the recent Policy
Exchange Paper, Delivering a 21st Century Infrastructure for
which makes a number of recommendations to reform infrastructure
(i) establishment of a UK Infrastructure Investment
(ii) creation of a regime for the guarantee of
an element of senior debt in projects, which is likely to reduce
the cost of the remaining private sector financing, including
use of mechanisms adopted in the utilities sector; and
(iii) encouragement of tax-free individual savings
accounts to be extended to infrastructure investment.
Finally, we believe that there is likely to
be continued innovation by the private sector, encouraged by the
stable long-term returns achieved through infrastructure investment.
Recent evidence of this includes an article in the Financial
on a private sector proposal to privatise the public road network,
seeking to adopt a variant Private Finance model (in this case,
the US style PPP transfer and operate model).
Question 10: Is there an optimal mix between
conventional public procurement and Private Finance for public
sector investment? What is the long run role of private finance
in the delivery of infrastructure both in the UK and globally?
There is a compelling case, especially in light
of the current fiscal constraints, for a greater role for the
private sector (and for Private Finance) in the delivery both
major Government infrastructure and public services. To place
this in context, the role of Private Finance transactions (PFI/PPP)
is recognised as a small (ie 10-15% of the total) but important
part of the overall Government expenditure on public service infrastructure.
Whereas the balance between public procurement
and Private Finance has remained unchanged over the past ten years,
it is important to note the increasing role of Private Finance
in the regulated and quasi-regulated utilities sectors, such as
telecommunications, airports, rail, water and energy sectors in
In recent years, the emergence of "infrastructure"
as a separate recognisable asset-class has led to the creation
of private capital, infrastructure investment funds attracted
by the long-term stable cash-flows to match long-term liabilities
of pension funds and insurance companies. This has attracted significant
overseas investment into the UK in the airports, telecommunications
and utilities sectors. Internationally, the use of Private Finance
to deliver long-term infrastructure requirements is continuing
to increase significantlyincluding in the US, Brazil, across
the Middle East, in India and Asia (including China), and in many
parts of Eastern and Western Europe.
Private Finance is not suitable for the delivery
of all of the UK's public infrastructure requirements. Where Private
Finance is deployed, however, it provides an enduring partnership
between the public and private sector, providing rigour and long-term
For further articles on the impact of the liquidity
crisis on PFI, see also: (i) KPMG, "The Use of mini-perms
in UK PFI, passing fad or here to stay", published June 2009
(http://www.kpmg.co.uk/pubs/Mini_Perm_Article.pdf); and (ii) KPMG's
Transport Advisory Newsletter, "Fixed-Rate Funding Models",
published August 2009 (http://astraeus.kpmg.com/SiteCollectionDocuments/Transport-advisory-newsletter-August-09.pdf)
52 Mott MacDonald Report, "Review of Large Public
Procurement in the UK", July 2002 (http://www.hm-treasury.gov.uk/d/7(3).pdf).
HM Treasury has also adopted its Value for Money model for assessment
of PFI/PPP projects-however, little is known outside UK Government
on its operation. Back
However, please refer to "PFI in school building-does it
influence educational outcomes?" KPMG's Infrastructure Spotlight
Report, 2009 Edition (http://www.kpmg.com/SiteCollectionDocuments/PFI-in-school-building.pdf) Back
Refer to 4Ps publication, "the competitive dialogue process"-April
2007 (http://www.localpartnerships.org.uk/UserFiles/File/Publications/4PS_CDprocess.pdf) Back
Refer to, "The use of Restricted Procedure in PPP/PFI in
selected European countries" by Ernst & Young, August
Refer to, paragraph 2.25 of "PFI: Strengthening long-term
partnerships", HM Treasury, March 2006 (http://www.hm-treasury.gov.uk/d/bud06_pfi_618.pdf).
Please also refer to HM Treasury, "PFI: Meeting the Investment
Challenge", published July 2003 (http://www.nao.org.uk/publications/0708/making_changes_operational_pfi.aspx)
and "Infrastructure Procurement: delivering long-term value",
HM Treasury, March 2008 (http://www.hm-treasury.gov.uk/d/bud08_procurement_533.pdf). Back
Since 1997, the NAO have published over 60 reports of investigations
into PFI and PPP deals. Please refer to the National Audit Office
(NAO) website site, section on "Private Finance" (http://www.nao.org.uk/areas_of_specialist_expertise/private_finance/recommendations.aspx) Back
Please refer to the NAO Report on "PFI: Construction Performance",
published 5 February 2003 (http://www.nao.org.uk/publications/0203/pfi_construction_performance.aspx) Back
Please refer to the NAO Report on "Modernising Construction"
published 11 January 2001 (http://www.nao.org.uk/news/0001/0001187.aspx) Back
NAO Report on "PFI: Construction Performance", published
5 February 2003 (http://www.nao.org.uk/publications/0203/pfi_construction_performance.aspx) Back
NAO Report on "Making Changes in Operational PFI Projects",
published 17 January 2008 (http://www.nao.org.uk/publications/0708/making_changes_operational_pfi.aspx) Back
Partnerships UK, Projects Database (see http://www.partnershipsuk.org.uk/puk-projects-database-search.aspx) Back
See footnote 5, above. Back
PwC "Talking Points-Meeting the infrastructure funding gap:
Government Intervention" (http://www.pwc.com/en_GX/gx/government-public-sector-research/pdf/ppplendingreview_230109.pdf) Back
PwC, "Taking Points-A review of lending appetite for Public-Private
Partnership Financings", January 2009 (http://www.pwc.com/en_GX/gx/government-public-sector-research/pdf/ppplendingreview_230109.pdf)
and Ernst & Young, "Senior Debt Pricing: Impact of the
Credit Crunch", published October 2008 (http://www.ey.com/Publication/vwLUAssets/UK_Infrastructure_Oct_08_-_Senior_debt_pricing/$file/EY_UK_Infrastructure_Oct_08_Snr_debt_pricing.pdf) Back
PwC, "Taking Points-A review of lending appetite for Public-Private
Partnership Financings", January 2009 (http://www.pwc.com/en_GX/gx/government-public-sector-research/pdf/ppplendingreview_230109.pdf)
and Ernst & Young, "Senior Debt Pricing: Impact of the
Credit Crunch", published October 2008 (http://www.ey.com/Publication/vwLUAssets/UK_Infrastructure_Oct_08_-_Senior_debt_pricing/$file/EY_UK_Infrastructure_Oct_08_Snr_debt_pricing.pdf). Back
See for instance, PwC Public Sector Research Centre publication,
"No Going Back, Complex Procurement Beyond PFI", November
2008 (http://www.pwc.com/en_GX/gx/government-public-sector-research/pdf/nogoingback_final_171108.pdf) Back
See "Infrastructure Procurement: delivering long-term value",
HM Treasury, March 2008 (http://www.hm-treasury.gov.uk/d/bud08_procurement_533.pdf) Back
Policy Exchange, "Delivering a 21st Century Infrastructure
for Britain" (http://www.policyexchange.org.uk/publications/publication.cgi?id=132) Back
Financial Times, "Call to Privatise Main Roads",
published August 24 2009 (http://www.ft.com/cms/s/0/483e9382-90cf-11de-bc99-00144feabdc0.html) Back