What should we make of PFI’s successor, PF2? asks Jon Hart of Pinsent Masons.
The Private Finance Initiative (PFI) that has been in use since the early 90s, and which has been used to deliver a vast range of infrastructure, from schools and hospitals to roads and light rail, satellites to dog kennels, has been consigned to the history books.
The end of PFI has, however, led to a hiatus in the market place. A number of “old” PFIs are still in procurement and are limping over the finish line – most recently Alder Hey Hospital in Liverpool, which achieved financial close last month. The hiatus has meant an end to new deals. Instead there has been an extensive period of consultation by the government with industry (part of the “call for evidence”) on why PFI was so bad, and why its replacement model, PF2 is going to be a significant improvement.
Two draft project agreements have been consulted upon – the Education Funding Agency (EFA) model for use on
the Priority Schools Building Programme (PSBP) and the Treasury’s own template Standardisation of PF2 Agreements, both issued at the end of last year.
So far the pipeline in respect of PF2 projects remains slim, when compared to the high-water mark of PFI projects at the end of the nineties and early noughties. In terms of firm, committed projects being procured under PF2, these are (apparently) limited solely to the first five tranches of the PSBP that are not being procured using capital funding, and the Sandwell Hospital project. The EFA is considering potential further tranches of schools that might be procured using PF2 and possibly further projects may come to light following the Comprehensive Spending Review in June.
Mark II: PFI’s replacement model, PF2, will be a significant improvement, according to the government Photograph: © Motoring Picture Library/Alamy
The augurs are not necessarily very good, however. The Department for Transport and the Ministry of Defence, which had both been considering using PF2 (for procuring trains and barracks respectively), have backed away from using private finance (“too slow to procure”; “insufficient value for money”).
However, the Treasury has made it clear that if a publicly procured project is going to be procured using private money, then PF2 is “the only game in town”. This is spelled out in its Procurement Routemap, published in January this year. There will be no back-sliding to the old PFI models, so for those contractors looking at the PSBP or potential other projects using PF2, it is worth being familiar with some of PF2’s salient features and differences with “old style” PFI:
- In contrast to PFI project companies, which were wholly privately owned, under PF2 the public sector will invest directly (and have a seat at the table). There may be more than one type of private sector investor in the company too: the original bidder-sponsor for the project, and a third party equity investor, brought in at a later stage of the bid process. From a construction contractor’s perspective, this could mean a range of new dynamics on a project (particularly where previous experience has been the investment arm and construction arm of the same company working together).
- Taking the lead from the Scottish non-profit distribution model (NPDM) approach, PF2 is going to be light on soft FM services. Procuring authorities will have options to introduce “call off” services once a project is up-and running. For construction contractors, this may require a rethink as to the way in which interfaces with the FM team and help desk are to be set up — there may also be knock-on effects on handover and snagging arrangements.
- Again, taking its lead from Scotland, PF2 introduces new requirements for visibility of life cycle arrangements and treatment of life cycle surpluses. This may mean changing approaches to the way in which whole life costing and asset management are to be built up.
- Risk allocation for change in law has been passed back from private sector to public sector. This should be factored into any contingent elements in price build ups – post construction.
- Despite changes to the contractual structures from PFI to PF2 and a few changes, many of the other features of the PF2 contract documentation should be relatively familiar to those experienced in PFI projects. Some of the key documents are all still subject to review, but it seems safe to say that the majority of features of PF2 contracts should follow those of PFI: for the greater part, there is not going to be easing of the difficult risk allocation in respect of design and construction obligations to construction contractors.
The big question remains as to where the pipeline for PF2 projects might be found. Without projects to apply its shining principles, PF2 will run the risk of remaining an abstract construct.
Jon Hart is a partner in the projects group at Pinsent Masons. [email protected]
