PFI Bulletin

After much delay and speculation as to its contents, Sir Malcolm Bates' second review of the Private Finance Initiative was published on the 22nd July 1999 alongside the Gershon Report on government procurement.

As was widely suspected, the report contained proposals for a new PFI body to help fund the costs incurred by public sector parties in establishing and signing PFI projects. This body is to be called Partnerships UK rather than "UK Capital", the name previously touted for the organisation. Sir Malcolm believes that PFI expertise needs to be centralised to consolidate and strengthen PFI co-ordination.

The review has found that there is still insufficient evidence of deal making skills in departmental PFI units and that such units lack the essential skills for creating effective partnerships. Consequently, a long term requirement for central PFI experience remains, something the Treasury Taskforce (TTF) was initially supposed to tackle in two years.

Sir Malcolm concluded that it was impractical to extend the life of the TTF or to create a fee earning agency as it would be difficult to retain staff of the required calibre for these bodies.

It is intended that PUK will work with both the private and public sectors to address weaknesses in the current process. Although PUK will be a private sector body, it is to have a strong mandate to address weaknesses in the public sector. Essentially, it is intended to make available to the public sector expertise which until now only the private sector has been able to afford.

PUK is expected to deliver value for money for public bodies and to inject a detailed examination of practical considerations into the decision making process, driving forward the conclusion of deals.

It is stressed in the report that PUK is to have no monopoly position nor a guaranteed market - it will have to win business. This is presumably intended to avoid the legal challenges that might have been made against the Government based on EU competition law that were threatened prior to the announcement.

The Government is arguing that by using PUK to create a better flow of well structured projects, private sector costs will be reduced.

PUK will be established as a plc and as the majority interest will be in private hands it will be off the government's balance sheet. However, the report states that the government has some degree of control as it has the right to appoint a minority of non-executive directors.

With regard to the funding of PUK, the report specifically states that the government will inject the minimum amount of cash necessary to successfully launch PUK, though it is not expecting to contribute more than £20m.

Contrary to pre-publication speculation, the report states that PUK is not a bank and its main role will be project management and to provide development funding where it is necessary to get the deal off the ground. PUK "will, where necessary, provide a range of financial products ... in the early stages of the procurement process, which enhance ... existing flows of private finance."

However, at no point does the report identify how PUK will recoup these outgoings. One of the key questions left unanswered is whether PUK will charge fees or take equity stakes in projects.

Perhaps one of the most interesting proposals, made possible by the creation of such a central body, is the envisaged bundling together of smaller projects, likely to be from local government, which individually would not have been a viable investment for public money.

The Gershon report on public procurement recommends the establishment of the Office of Government Commerce (OGC), to be a distinct organisation within the Treasury (which will encompass the TTF).

The OGC will centralise government procurement (although it will not be involved in defence procurement) so as to establish a consistent approach which will allow changes to procurement methods to be driven through.

It is recognised that PFI provides a higher sustainable level of investment in public services and so it is intended that the OGC will introduce the PFI into the core procurement options open to public bodies.

Rather than the TTF being disbanded, as was widely predicted, it is set to continue as part of the OGC. It will retain responsibility for PFI policy and advice and will chair the project review group responsible for prioritizing the allocation of PFI credits to local authority PFI projects.

A Steering Group will be formed prior to the raising of private finance, which is expected to begin its work in March 2000.

The Steering Group will include representatives from Abbey National Treasury Services plc, Barclays Bank, Halifax, Prudential, the Royal Bank of Scotland and the European Investment Bank.

The raising of private sector capital will be carried out on a competitive tendering basis.

The Report contains some interesting recommendations, though it does not take the bold step of establishing an investment bank - at least not at this stage. The omission of details as to how PUK will be paid could be seen as a loophole to be filled by equity stakes, once the government has had the chance to convince more of the private sector that this is a good thing.

The market will welcome the continuation of the TTF as a policy shaper (and, presumably the provider for guidance). This will ensure that one of the mainstays of the PFI process will remain. However, it seems likely that most - if not all - of the deal making skills (in the shape of the projects team section of the current TTF team) will transfer into PUK, leaving an exclusively "civil service" TTF which could lose touch with ongoing deals.

The changes should be seen in the context of the first Bates Report produced in the Summer of 1997, following which the Treasury Taskforce was established and (by common consensus) substantial strides were made in the development of a sound basic model for the procurement and delivery of PFI projects.

At least the delay - which has been creating a damaging climate of un-certainty in the PFI market place - is finally over.

Our team of PFI specialists will be happy to discuss issues arising from this Bulletin (or any other questions you may have as to PFI/PPP projects).

For further information please contact David Hickman, Tel: +44 20 7655 1000