Private Finance Projects and off-balance sheet debt - Economic Affairs Committee Contents

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 sheet debt.

  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).[52] 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.[53] 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[54] is far more onerous than the approaches adopted by other member states.

  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 projects.[55] 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 and performance.

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 procured infrastructure.[56] 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.[57]

  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[58] noted significant deficiencies in the traditional procurement methodology. In addition, the 2001 NAO Report on Modernising Construction[59] found significant deficiencies in the traditional procurement process.

  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[60] 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 allocated.

  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 traditional procurement?

  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 debt funders.

Question 5:   When the basis of a Private Finance contract needs to be altered post procurement because of changing client needs—for example, a bigger jail is required due to a larger than expected prison population—has 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[61] 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 of PFI.

  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 method.

  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,[62] 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.[63]

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.[64] 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.[65] 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.[66]

  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 has reduced.

  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 and/or delivery?

  PFI is only one of a number of alternative models for the introduction of Private Finance into public procurement.[67] 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.[68] 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 Britain[69] which makes a number of recommendations to reform infrastructure investment/financing, including:

    (i) establishment of a UK Infrastructure Investment Bank;

    (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 Times[70] 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 the UK.

  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 significantly—including 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 asset stewardship.

( Use_of_Restricted_Procedure_to_procure_PPP_


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 (; and (ii) KPMG's Transport Advisory Newsletter, "Fixed-Rate Funding Models", published August 2009 (

52   Mott MacDonald Report, "Review of Large Public Procurement in the UK", July 2002 ( 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

53   However, please refer to "PFI in school building-does it influence educational outcomes?" KPMG's Infrastructure Spotlight Report, 2009 Edition ( Back

54   Refer to 4Ps publication, "the competitive dialogue process"-April 2007 ( Back

55   Refer to, "The use of Restricted Procedure in PPP/PFI in selected European countries" by Ernst & Young, August 2009 Back

56   Refer to, paragraph 2.25 of "PFI: Strengthening long-term partnerships", HM Treasury, March 2006 ( Please also refer to HM Treasury, "PFI: Meeting the Investment Challenge", published July 2003 ( and "Infrastructure Procurement: delivering long-term value", HM Treasury, March 2008 ( Back

57   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" ( Back

58   Please refer to the NAO Report on "PFI: Construction Performance", published 5 February 2003 ( Back

59   Please refer to the NAO Report on "Modernising Construction" published 11 January 2001 ( Back

60   NAO Report on "PFI: Construction Performance", published 5 February 2003 ( Back

61   NAO Report on "Making Changes in Operational PFI Projects", published 17 January 2008 ( Back

62   Partnerships UK, Projects Database (see Back

63   See footnote 5, above. Back

64   PwC "Talking Points-Meeting the infrastructure funding gap: Government Intervention" ( Back

65   PwC, "Taking Points-A review of lending appetite for Public-Private Partnership Financings", January 2009 ( and Ernst & Young, "Senior Debt Pricing: Impact of the Credit Crunch", published October 2008 ($file/EY_UK_Infrastructure_Oct_08_Snr_debt_pricing.pdf) Back

66   PwC, "Taking Points-A review of lending appetite for Public-Private Partnership Financings", January 2009 ( and Ernst & Young, "Senior Debt Pricing: Impact of the Credit Crunch", published October 2008 ($file/EY_UK_Infrastructure_Oct_08_Snr_debt_pricing.pdf). Back

67   See for instance, PwC Public Sector Research Centre publication, "No Going Back, Complex Procurement Beyond PFI", November 2008 ( Back

68   See "Infrastructure Procurement: delivering long-term value", HM Treasury, March 2008 ( Back

69   Policy Exchange, "Delivering a 21st Century Infrastructure for Britain" ( Back

70   Financial Times, "Call to Privatise Main Roads", published August 24 2009 ( Back

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