Private finance is dead: long live private finance


Financier Worldwide Magazine

April 2018 Issue

In 1897 a journalist (thinking him to be on death’s door) was sent to enquire after American author, Mark Twain’s, health. Twain, who was in fact perfectly well and would go on to live until 1910, reportedly stated that, “reports of [his] death [were] greatly exaggerated”. The same could be said for public-private partnership (PPP) investments in the UK.

Private sector investment in UK public services, and its most famous form PFI (now PF2), has had a rough 12 months. There have been a number of factors that have led to the recent spate of negative news headlines, such as the limited opportunities for PPPs in the UK public infrastructure market since the financial crisis (outside of the secondary market), the Labour party’s calls for re-nationalisation of the country’s assets, the National Audit Office (NAO) publishing a report citing, “a lack of data on the benefits of private finance procurement” and determination in some parts of the media to badge the collapse of Carillion as the first in a sequence of funeral drum beats for PF2.

It is hard to deny that this has been a bad year for UK PPP but, beneath the surface, PPP (and the case in favour of the use of PPP) is alive and well in the UK and is in fact expanding its reach beyond its usual spheres of influence.

Demand is still standing

Despite poor publicity, there is no evidence the market is deterred. There is no good reason that PPP projects in the UK should not remain an attractive and stable investment, provided they are appropriately structured. Indeed, the limited amount of equivalent European infrastructure deals in which to invest at present would likely make a pipeline of UK PPP projects an attractive proposition. In an era with relatively low cost of debt, investments with a PF2/PFI risk allocation could prove attractive. The PFI/PPP type risk allocation has been used over and again and similar risk allocations have been banked worldwide.

While post financial crisis reforms (and enhanced liquidity requirements) may have constrained the banking sector’s ability to lend over long tenors, institutional investors and the wider capital market have capacity to fill the void.

More supply is on its way

Short of a change in government, PPP remains part of government policy. In September 2017, the prime minister stated that the free market was the “greatest agent of collective human progress ever created”. Transport for London’s Silvertown tunnel procurement (for the design, finance, construction and maintenance of the new Silvertown Tunnel) is ongoing and, in December 2017, Highways England publicly consulted the market in respect of two proposed new privately financed projects, namely the A303 (a new road tunnel under the Stonehenge World Heritage Site) and part of the Lower Thames Crossing project (a large scale road and tunnels project comprising a privately financed element in respect of the associated link roads).

In addition, it is important not to overlook the back catalogue of PPP projects in place across the UK.

Don’t stop – do it better

While it is too early to speculate as to the exact cause of the Carillion collapse, a clear lesson to take away is the need for investors to understand the risk allocation on which they are doing business. Too often public procurement processes can end up with bidders chasing the ‘win’ and submitting low-cost bids without fully appreciating the risk allocation they are signing up to. This practice is not in either the public or private sector’s best interest. The focus on price as the most important factor in the ‘most economically advantageous tender’ model has led to an unsustainable race to the bottom. Cheapest is not always best.

This, however, is not a reason to scrap PPPs. It is a reason to do them better. Whatever the reasons for the collapse of Carillion, the fundamental fact remains that private finance has delivered hundreds of public sector assets, efficiencies can be achieved by allocating risk to the private sector, and the government cannot afford to deliver large swathes of public sector investment solely through public sector borrowing.

In spite of recent negative attention, from the perspective of public sector entities, PF2 arrangements potentially create the right incentives, including: (i) incentives for the private sector to build assets on time and on budget, as it bears the risk of construction overruns; (ii) incentives for the private sector to reduce long-term running costs, as it is responsible for operation of the assets; and (iii) incentives for the private sector to provide well-maintained assets, as it is responsible for maintenance throughout the contract term.

For all these reasons, PF2 should remain attractive to the public sector. However, in order to realise the benefits such incentives may bring, risk allocations must be maintained and understood, not just in principle but in the nuts and bolts of the contract, for example across the payment mechanism.

The challenge for the government is therefore not, how do we scrap PPP transactions, but rather, how do we improve them? Progress has already been made in this area. Changes as far back as 2012 to the typical PFI risk allocation (now PF2) saw proposals for public sector minority investment in PPP projects (this enables genuine risk sharing and creates alignment between the public and private sectors), competitions introduced to identify equity co-investors after the appointment of a preferred bidder (this enabled smaller funds to participate as owners and investors in public assets) and the introduction of a requirement that the procurement process should last no longer than 18 months (which requires all parties to save costs and focused the private and public sector alike on the need for delivery and the urgency of completion).

These are all helpful steps to enable better collaboration and joint working between the public and private sector. The government certainly does not appear to have given up on PPP. In fact, in October 2017, Construction News reported that the government was further reviewing the terms of the PF2 contract suite. As such, further adaptations to the orthodox approach can be expected, and it is hoped that the changes will bring with them further collaborative initiatives and greater resistance to the ever-tempting race to the lowest price and smallest margins.

Moving beyond the public sector

While PPPs in the public arena continue to evolve, it is not the only area where it is being considered. As part of its recent Price Review 2019 Methodology, the Water Services Regulation Authority (Ofwat) has unveiled a new model – direct procurement for customers (DPfC). DPfC is essentially an arrangement whereby a water company competitively tenders and issues a contract for a private sector entity to build, operate, maintain and (critically) finance a large scale and discrete, infrastructure project that would, under normal circumstances, be delivered directly. The vanilla DPfC project (as envisaged by Ofwat), appears to include a 15-25 year operations period, a competitively tendered revenue stream that starts after construction and that is spread over the contract period, and a mechanism to capture and share with customers any material refinancing gains.

These are the core building blocks of a classic PPP arrangement. Far from being long dead and buried, PPPs are being revamped and exported to other sectors in a continuing bid for improvement and an effort to create value.

The conclusion is clear. PPPs are not dead and, if done correctly, they will continue to represent value. The challenge is adapting what we have to ensure improved and sustainable public and private sector value. The next three to five years will see the evolution of PPPs – they will be shaped by lessons learned across multiple countries and sectors.


Nicola Sumner is a partner and Steve Gummer and Juli Lau are associates at Sharpe Pritchard LLP. Ms Sumner can be contacted on +44 (0)20 7405 4600 or by email: Mr Gummer can be contacted on +44 (0)20 7405 4600 or by email: Ms Lau can be contacted on +44 (0)20 7405 4600 or by email:

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