UK Chancellor Hammond signals the end of the most mature PPP/P3 market

In his address to parliament for the 2018 Budget, United Kingdom’s Chancellor Philip Hammond has announced the abolishment of Private Finance Initiative and PF2, pledging to never sign another deal. Does this mean Public-Private-Partnerships and their contract structures are dead in the UK?

WT unpacks the rhetoric and explores how this may affect the future of PFI/PPP/P3

By Adam Shaw, Nick Conte and Jake Witt

The Private Finance Initiative (PFI) is a delivery method of providing funds for major capital investments, such as infrastructure and other mega public projects, where firms from the private sector are contracted to complete and manage these public projects.

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HAMMOND SAYS:

I have never signed off a PFI contract as Chancellor…and I can confirm today that I never will.

I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector but there is compelling evidence that the private finance initiative does, I can announce that the government will abolish the use of PFI and PF2.

We will establish a center of excellence to actively manage these contracts in the taxpayers’ interest starting in the health sector.

The Verdict

PFI and PF2 models have dealt with critics both inside and outside the construction industry before.

The proposed annulment makes room for a new model to replace it. However, this harkens back to a very similar issue which took place during  the Global Financial Crisis of 2008. The Scottish National Party developed the Scottish Futures Trust to effectively replace the PFI model in Scotland. The newly rolled out model, Non-Profit-Distributing (NPD), which capped private sector earnings, sending surplus profits back into the public sector, supposedly shattered the illusion of “excessive private profits.” This was later shut down by the EU in 2014 (IJGlobal, 2018). The NPD was widely regarded as identical to its predecessor and critics have ranked the measure as an expensive political rebranding operation. Wales subsequently tweaked the NDP so private sectors were not capped however, 20% of the total equity will be shared with the public sector as shareholdings are mixed – fostering collaboration and keeping 80% off the balance sheets (IJGlobal, 2018).

We can expect the P3 model will endure as England will restructure and rebrand, presumably with a similar three-letter acronym. It is important to note that the development of the private sector and the public sector should not be mutually exclusive. As evidenced in the US, Canadian and Australian models, P3 projects are divisive and complex in their nature, but with flexibility and an emphasis on partnership, P3s can take on many forms to suit the infrastructure and the means of financing it – delivering monumental projects that are on time and on budget.

Hammond’s comments were (seemingly) intended to create shock and awe, and that’s what he got.  Scratch below the surface, and all he is saying is that there needs to be more rigor around the contract structures, value for money and on-going management.   It’s exactly what every other market has been doing for some years.  I think the market is safe from anything other than a very temporary blip which will recover as quick as the news cycle changes.

Adam Shaw, Executive Vice-President of WT Partnership

About WT:

WT Partnership is one of the fastest growing advisory firms in North America. WT was founded in Australia back in 1949, WT is known as the oldest start-up in the industry and has been a force in North America since 2015. Ranked in the Top Two Global P3/PPP Technical Advisory Firms by Inframation in 2017/18 and WT currently manages $6.5 billion dollars of active mega projects across North America.

Media Contact:
Jake Witt, Brand Manager
jake.witt@wtpartnership.co | +1 424.218.5333

SOURCES & REFERENCES:

  • BBC, 2018. PFI deals ‘costing taxpayers billions’. British Broadcasting Corporation News, [Online]. 1, 1. Available at: https://www.bbc.com/news/business-42724939 [Accessed 1 November 2018].
  • Davies, R., 2018. Hammond abolishes PFI contracts for new infrastructure projects. The Guardian, [Online]. 1, 1. Available at: https://www.theguardian.com/uk-news/2018/oct/29/hammond-abolishes-pfi-contracts-for-new-infrastructure-projects [Accessed 1 November 2018].
  • HM Treasury, 2018. Private Finance Initiative (PFI) and Private Finance 2 (PF2). HM Treasury, [Online]. 1, 1. Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752173/PF2_web_.pdf [Accessed 1 November 2018].
  • IJGlobal, 2018. PPP – drip, drip…silence. Private Finance & Infrastructure Journal, [Online]. 1, 1. Available at: https://ijglobal.com/?utm_source=IJGlobal_Announcement_02/11/2018_16%3A07&utm_medium=email%20editorial&utm_content=Editorial&utm_campaign=EN_290984&utm_term=IJGlobal%20header [Accessed 2 November 2018].
  • Jubilee Debt Campaign, 2017. The UK’s PPPs Disaster Lessons on private finance for the rest of the world. Jubilee Debt Campaign, [Online]. 1, 10. Available at: https://jubileedebt.org.uk/wp-content/uploads/2017/02/The-UKs-PPPs-disaster_Final-version_02.17.pdf [Accessed 1 November 2018].
  • National Audit Office, 2018. PFI and PF2. National Audit Office, [Online]. 1, 54. Available at: https://www.nao.org.uk/wp-content/uploads/2018/01/PFI-and-PF2.pdf [Accessed 1 November 2018].
  • ‘Private Finance Initiatives’, Public Accounts Committee, June 2018; ‘Fiscal Risks Report’, Office for Budget Responsibility, July 2017.