Britain’s PPP bashing

There’s something slightly sad about what’s happening to the UK’s private finance initiative (PFI), the 
country's standardised procurement programme that popularised public-private partnerships. Once seen as an innovative and highly effective procurement tool (just look at how many countries have imported it since its inception), it is now being slowly, but steadily, dragged through the mud by certain political forces.

In its latest report on PFI, the UK’s public accounts committee, an investigative body made up of cross-party Members of Parliament, wrote that “there is no clear evidence to conclude whether PFI has been demonstrably better or worse value for money than other procurement options”.

It’s hard to believe that after all these years and an untold number of projects concluded, UK politicians are still comparing PFI – a procurement method which effectively prices the construction and operating costs of projects under a single contract, transferring those risks to the private sector – with public procurement, which unbundles construction and management.

Worse, this comparison does not even appear to be made seriously. To put it bluntly, the committee presents no data whatsoever to back its claims. It gives no data illustrating the lifecycle costs of public procurement vis-à-vis PFI. And there is no mention that PFI came to life to provide the sort of turnkey delivery that avoids the delays and cost overruns of ever-changing public contracts.

It's interesting to contrast this data blackout with figures recently published by the European Construction Industry Federation (FIEC) last December, which state that “the global saving [of PPPs] is probably around 25 percent compared to classical procurement,” although the trade body admits there is need for more comparative data.

Much of the current distaste for PFI has, of course, to do with money. Bank debt has, since the global financial crisis burst, become more expensive. And even though margins have decreased from their immediate post-crisis peaks, they still remain high, with project costs increasing in tandem.

But since PFI's long-term benefits are being ignored in the UK, the discussion around it has acquired a negative tone. Instead of being creative and focusing on how to improve the system, it has become destructive, threatening investors with the prospect of contractual renegotiations to claw back money for the taxpayer.

If you want constructive public sector discussions on how to improve the public-private partnership (PPP) model, you had better turn to France these days. Like the UK government, French authorities are also unhappy with the cost of debt for PPPs. But because they have embraced the model for its greater efficiency and long-term benefits, they are working hard to fix the problem.

Importantly, they have understood that banks (now more than ever) are not suited to be the long-term holders of infrastructure debt. So they have teamed up with them and other infrastructure investors to devise a solution.

You can read about it in more detail here, but, to give you the gist of it, a state-backed securitisation fund is set to launch later this year with the purpose of refinancing PPP debt post-construction, using the capital markets.

These bonds will use a mechanism that, under French law, already allows the majority of the availability payments that back PPPs to be transferred from the developer directly to its creditors. This means the buyers of these bonds will, in the case of projects procured directly by the French state, effectively hold AAA-rated paper, their payments serviced directly by the state.

It's a bold solution that involves greater risk sharing with the public sector and could even, one day, run afoul of Eurostat, the EU’s statistics arm. But it’s a solution that recognises the model’s merits and aims to keep it alive. Crucially, it’s a solution that clearly understands banks are not in a position anymore to adequately price the lifecycle costs of PPPs, and works to lower those costs as much as possible.

How ironic that France, which before 2004-2005, barely used PPPs, is now willing to fight for a model that may be in danger of abandonment in its country of birth.