In December last year HM Treasury published its proposals in relation to PF2.1 PF2 represents the new model through which the Government seeks to deploy projects which, prior to the Spending Review 2010, would have been described as PFI or PPP projects.
The 15 or so years of "old type" PFI awards has led to many criticisms, but also the delivery of many assets that would not have been otherwise delivered. A developing feature of PFI models was an evolving standardisation of contracts, most clear in programmes such as NHS Lift and Building Schools for the Future (BSF).
An interesting characteristic of both NHS Lift and BSF was the participation of the relevant authority as investor in and representative on the board of directors of the special purpose entity. It is the view of the author that the opportunities of such participations were missed by the participation level being low (10%). Accordingly, whilst the sponsoring authority did have a seat at the table, it did not have a particularly powerful voice.
The PFI/PPP model did also present itself as something of a missed opportunity for the development of skills within the wider public sector because each sponsoring authority would develop a skills base to deliver these contracts from an initial low base, only to disband such teams and see the expertise dissipate once the project moved to operational phase.
Accordingly, two powerful features of the PF2 model will hopefully learn lessons from the points noted above:
1. Equity participation. The normal PF2 model will have the public purse invest its own equity into the project on the same basis and terms as the private sector investors.
2. Identity of the investor. The PF2 investor is to be a central unit of HM Treasury rather than the sponsoring authority or central Government department.
Whilst central investment ownership should lead to the central management and allocation of investment expertise and, indeed, the creation of a further UK sovereign wealth fund (in addition to UK Financial Investments and the Green Investment Bank) the benefits of innovation or efficiency will flow back to the Treasury rather than the value creator. Furthermore, interesting conflicts will arise between the various public sector stakeholders, one focussed on service delivery and the other on risk allocation and investment certainty.
A missed opportunity?
Whilst the state aid concerns are accepted, the insistence of Government in recent years to view financial support as investment which can only be made on the same terms as private investors seems to miss an opportunity to really leverage up the benefits of the public balance sheet for the benefit of all.
Public sector organisations are able to take longer term views than an investor and, accordingly, the public sector can price and structure its finance in a different way, having particular regard to the very different risk profile it can offer. If public sector organisations structured their investment to bridge the funding gaps remaining in so many project models, the Government could use its PF2 contractual arrangements as a practical way in which to deliver economic growth, the thing that the Government keeps saying it is focussed on.
How different is it?
Juliet famously said "what's in a name?" According to HM Treasury, quite a lot. Furthermore, the PFI brand had become a little toxic. However, we wait to see whether this rose by another name smells sweeter than PFI/PPP.
Footnotes
1 HM Treasury's proposal "A new approach to public private partnerships" is available at http://www.hm-treasury.gov.uk/d/infrastructure_new_approach_to_public_private_parnerships_051212.pdf.
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