PFI GBP40 billion UK projects in 10 years

Private finance initiative gets GBP40 billion UK projects going in less than ten years

A report newly published by the Royal Institution of Chartered Surveyors on the current state of the Private Finance Initiative finds the PFI not only well established as an important contributor to capital expenditure in Britain but growing in acceptance in many European States.

"It is a positive time for PPP/PFI, with project potential increasingly recognised." Across Europe and elsewhere, says the report entitled Quantifying Quality, governments and local authorities are investigating how the concept of Public Private Partnerships and the Private Finance Initiative might work in their markets.

But despite enormous interest at regional, national and international levels, outside the United Kingdom there has been disappointment at the lack of successful ventures using these forms of finance.

One of the key barriers, the compilers believe, has been the lack of government skills in identifying and bringing forward projects into the market.

Many member states of the European Union have however established offices to facilitate privately financed infrastructure projects - for example Ireland, Italy and the Netherlands.

PPP/PFI policies have also been developed in Australia, Canada and South Africa but the number of projects brought to completion in this way has so far been relatively small.

For the current financial year, according to departmental estimates, over GBP 3 billion worth of PFI deals have been signed and around GBP 2.5 billion for the following year.

The Department of Transport leads the way with GBP 1,494 million, next comes Health with GBP 848 million, then Defence with GBP 458 million.

Over this year and the two following, more than GBP 4 billion will be committed to transport projects by means of the PFI.

The RICS report points that out the majority of signed deals date from 1997 when reforms recommended by Sir Malcolm Bates were put in place and the Treasury PFI Taskforce was set up.

This was followed by Sir Peter Gershon's proposals for establishing the Office of Government Commerce and the formation of Partnerships UK to replace the projects arm of the Treasury Taskforce.

Since that time the volume of privately financed work has grown from an annual GBP 2,500 million (round terms) to the value of almost GBP 15 billion in 2003.

The 1997-2004 total is of the order of GBP 40 billion, compared with around GBP 2.5 billion in the previous ten years.

That is the general background, but people in construction business around the world will be more interested in the case studies produced as contributions to this timely study of the Private Finance Initiative.

These are not just a series of glowing tributes to the success of privately-financed projects.

There are successes of course which bear out the advantage which PFI can confer in terms of efficiency and added value; there is one which was a disaster for the contractor.

However, two studies of recent road improvements in Scotland demonstrate what may be gained by handing over design and build at an early stage to a competent contractor, and show PFI procurement evolving into a procedure whereby both the client authority and the builder are able to work in a partnership advantageous to both.

Bridging the Tagus - an early PPP.

Construction of the Vasco de Gama Bridge and the upgrading of the existing bridge over the River Tagus in Portugal is an early example of a public private partnership.

At the time it was one of the biggest infrastructure projects in Europe and if indications are to be believed it will before long be succeeded by another such venture.

The concept in the 1990s was to relieve congestion on the Abril 25th bridge which at the time was the only connection between the north and south banks of the river within 40 km of Lisbon's city centre.

To quote the conclusions drawn from this project, despite due diligence, a number of unforeseen problems occurred.

One related to alterations to an existing contract governing toll revenues on the old bridge, due to be transferred to the concessionaire.

Another related to a legislative gap that left the concessionaire exposed to significant under-recovery on toll revenues against the original financial model.

They were unforeseen risks which threw the project out of balance in financial terms; one message from that exercise is that unforeseen risks on PFI projects are dangerous to your financial well-being.

The concessionaire is Lusoponte, which at the time the bridge was under construction was a consortium of United Kingdom, French and Portuguese contractors - Kvaerner/Trafalgar House, Odebrecht and the Vinci Group.

According to the case study, the Portuguese Government is intent on incorporating a third crossing within this agreement.

Lusoponte is understood to have major involvement in the pre-feasibility development work for the new bridge.

The original project was part financed by a grant of 320 million euros from the European Cohesion Fund and 20-year loans amounting to 300 million eurosfrom the European Investment Bank, plus Portuguese Government contributions amounting to 164 million euros.

Thus the major part of the cost, estimated at around 850 million euros, was met from public sources.

In fact, at the outset there wasn't much private money in the contract.

Revenue to sustain it was to come initially from the transfer of income from the Abril 25th bridge, but this proved more difficult than expected.

Added to that, it took four years for legislation to come into force which allowed the concessionaire to clamp down on losses due to toll evasions.

The message for the private sector derived from the Tagus Bridge experience is that 'the advantages associated with innovative activity often appear to have been counteracted by unanticipated risks', hence the legal actions and the renegotiations which led to the 2002 settlement agreement.

As the case study puts it, the risk transfer mechanism did not specify which risks were to be taken entirely or shared by the public sector, leading to renegotiations over relatively undefined events that might affect the financial balance of the concession.

"This mechanism must be avoided in future to avoid complicated litigation".

Bankers buy in to the Tagus concession.

Also, it says that "the inter-related and changing shareholdings of Macquarie, one of the world's largest toll road operators, Kvaerner/Trafalgar House, Odebrecht and the Vinci Group, meant that the strategic management of the project was in a state of flux".

"However, the ability to divest early and still obtain reasonable returns on investment is a significant advantage for the contractors." How this advantage was derived is not spelt out in the case study, but it notes that 120 million euros was recovered from the refinancing operation of July 2000.

Otherwise, the case studies disclose little about the funding sources for the operations they review.

The 'inter-related shareholdings' presumably refer to the members of the contracting consortium and the fact that Macquarie was exercising its pre-emptive rights in acquiring an interest in the bridge concession when shareholdings came up for sale.

By that means the Macquarie Infrastructure Group, a wholly-owned subsidiary of the Macquarie Bank in Sydney, acquired its 30 per cent interest in the Lusoponte concession, a valuable feature of which is that the company has obtained exclusive rights to all further crossings of the Tagus River in the Greater Lisbon area.

That's quite a large area, and makes this private finance initiative a great deal more interesting.

It also shows that the Australians have taken a rather keener interest in private finance initiatives than had previously been thought.

Back to top