|
|
The quality of this article or section may be compromised by weasel words.
You can help Wikipedia by removing weasel words. |
The Private Finance Initiative specifies a method, developed initially by the United
Kingdom government, to provide financial support for "Public-Private Partnerships" (PPPs) between the public
and private sectors. This has now been adopted by parts of Canada, France, the
Netherlands, Portugal, Ireland, Norway, Finland, Australia, Japan, Malaysia, the United States (reference the Trans Texas
Corridor highway development project [1] and Singapore (amongst others) as part of a wider reform program for the delivery of public services which is
driven by the WTO, IMF
& World Bank as a part of their 'deregulation' and privatization drive.
These projects aim to deliver all kinds of works for the public sector, together with
the provision of associated operational services. In return, the private sector
receives payment, above the price that the Public Sector could have achieved the work, linked to its performance in meeting
agreed standards of provision.
Overview
PFI is used in central and local government. In the case of projects procured by local government authorities, the capital
element of the funding enabling the local authority to pay the private sector for these projects is given by central government
in the form of what are known as PFI "credits". PFI is not just a different way of borrowing money; the loans are paid back over
the period of the PFI scheme by the service provider who is at risk if the service is not delivered to standard throughout. The
local authority then procures a partner to carry out the scheme and transfers detailed
control, and in theory the risk, in the project to the partner. The cost of this borrowing as a result is higher than normal
government borrowing (but cheaper when better management of risks is taken into account) but does not all appear as borrowing in
public accounts.
Each PFI project is different depending on local circumstances. However there are some common threads that run through all
projects. The public sector authority signs a contract with a private sector "Operator". During
the period of the contract the Operator will provide certain services, which are currently provided by the local authority. The
Operator is paid for the work over the course of the contract and on a "no service no fee" performance basis. The authority will
design an "output specification" which is a document setting out what the Operator is expected to achieve. If the Operator fails
to meet any of the agreed standards it should lose an element of its payment until standards improve. If standards do not improve
after an agreed period, the public sector authority is entitled to terminate the contract.
PFI is therefore dependent on both the standard of contracts used and the determination of the parties to enforce them.
The National Audit Office scrutinises public spending on
behalf of Parliament and is independent of Government. It provides review reports on the value for money of many PFI transactions
and makes recommendations. The Public Accounts Committee and
Audit Commission also provide reports on these issues.
A notable example of PFI, and the only UK mission so far funded under the scheme, is the British Embassy in Berlin. The largest PFI in the world, as of 2006, will be the
AirTanker provision of the Future Strategic
Tanker Aircraft to the UK's Royal Air Force, valued in excess of £10 billion over
27 years.
Examples
The Private Finance Initiative was begun under the Conservative government of
John Major in 1992. It immediately proved controversial, as it
was perceived by critics[attribution needed] as a back-door form of
privatisation. Nonetheless, the Treasury found the
scheme advantageous and pushed Labour to adopt it after the 1997 general election. PFI has continued and, indeed, expanded under Labour. This has been strongly criticised by
many trade unions and elements of "Old Labour". The 2002
Labour Party Conference passed a vote against PFI, though this did not
change the government's policy.
According to Treasury and NAO reports, PFI deals are very much more likely to be delivered on time and on budget - a study by
the Treasury in July 2003 [2]
showed that the only deals in its sample which were over budget were those where the public sector changed their minds after
deciding what they wanted and from whom they wanted to buy it. It is claimed there is a far greater visibility of long-term
consequences of decisions made by politicians and civil servants through PFI deals than conventionally where most of the
long-term consequences and obligations of decisions are obscured from public scrutiny. This is not agreed with by those who
believe that the details of these deals are wilfully complex and buried in confidential documents and footnotes.
As against that, however, there have been a number of high-profile PFI failures, many of which have been exposed by
Private Eye, a British satirical magazine. One of the most shocking examples they
have brought to light is the Mapeley-STEPS deal. Under this deal the buildings of the Inland
Revenue and the contract for their maintenance was given to a company based in a tax-haven. Later that year Mapeley hiked
their charges well above the public sector cost due to financial problems in other parts of the company. It transpired that if
the Revenue didn't pay the higher costs Mapeley was likely to go bankrupt, in which case the buildings would have reverted to
Mapeley's bankers, the Royal Bank of Scotland.
Another example comes from a government report leaked on 17 June 2005. A new privately financed hospital in Leeds had
"breached every section of the fire safety code".[3]
The Skye Bridge PFI scheme infamously cost the public £93m (and required the closure of the
existing ferry to prevent competition), although it should have cost only £15m to build. Equally, the fact that major risks can
be effectively transferred has been demonstrated in a number of cases, most notably the National Physical Laboratory Laboratory; this deal ultimately caused the collapse of
the building contractor when the cost of building a complex scientific laboratory was very much larger than estimated. The
laboratory was ultimately built, but the cost of doing so caused the winding up of Laser, a
joint venture between Serco Group and John Laing
[4]. A recent BBC Radio 4 investigation into PFI noted the case of Balmoral High
School in Northern Ireland due to close because of lack of pupils but whose PFI deal is due to run for another 20 years at the
cost of millions of pounds to the taxpayer.
Furthermore, the scale of PFI projects in the health & education sectors since 1997 is now having a serious impact on
public service budgets. Because the projects are more expensive in the private sector (on average 30% more than if the Government
borrowed the money and did the work in the public sector) the payments to the private owners of the PFI schemes are stretching
already constricted budgets. Many Health Trusts are in serious difficulty
already, and when the level of spending falls in 2007, some may become insolvent. The Government is already in negotiation with
private healthcare providers to come in and run 'failing' Trusts. A recent investigation by Professor Jean Schaoul of Manchester
Business School into the profitability of PFI deals based on accounts filed at Companies
House revealed that the rate of return for the companies on 12 large PFI Hospitals was 58%, although the government
disputes this.
Additional controversy is caused by the off-balance sheet nature of PFI contracts. Under UK accounting, the PFI company does
not enjoy the risks and rewards of the building - the government carries demand risk, for example - so the building is not shown
on its balance sheet. Instead its main asset is the finance debtor - the long term contractual obligation of the government to
pay for the building. For the government accounting, the fact that it pays a single charge (the 'Unitary Charge') for both the
building and its maintenance is sufficient for it to be classed as a revenue item, so neither the building or the long-term
obligation to pay appear of the government's balance sheet. Were the total PFI liability shown on the UK balance sheet - as would
be required under UK accounting standards - the government's finance would look somewhat different.
Financial Structure
The typical PFI provider has three parts or legal entities: a holding company (known for short as Topco), a capital equipment
or infrastructure provision company (known for short as Capco), and a services or operating company (Opco). The main contract is
the concession contract between the Government and Topco. Topco then flows down requirements to Capco and Opco, with legal
contracts to enforce. These two legal entities then typically flow down their requiremnets to subcontractors, again with
contracts to match. Typically the main subcontractors are the same companies as the shareholders of the Topco. Large PFIs are
often let to consortia of companies rather to individual firms. The Capco may not be a separate legal entity but rather one of
the prime shareholders taking on the responsibility to provide the capital equipment (e.g. the hospital).
Large PFI projects are funded through the sale of corporate bonds, issued by the company
running the PFI. An essential feature of PFIs is that these bonds are rated as BBB- by a credit rating agency (for example
Standard and Poors). BBB- is the lowest investment grade rating, any lower than
that and the bond receives speculative or 'junk' status. If a rating of better than BBB- is given then the Government is likely
to want to renegotiate the deal, to lower the unit price it pays for the service. Any lower than BBB- means that investors would
be unlikely to take on the risk. So although bond rating typically affects the cost of borrowing for corporates, in the PFI case
it effects the whole viability of the deal. The reason for existence of the treasury team in the PFI supplying company is to gain
an investment grade rating. A PFI firm will typically go to two of the three main credit rating agencies, sharing details of
their financial model, concession contract and capital equipment solution.
Smaller PFI projects - the majority by number - are funded directly by banks in the form of senior debt. Senior debt is
generally slightly more expensive than bonds, which the banks would argue is due to their more accurate understanding of the
credit-worthiness of PFI deals - they may consider that the monoline providers underestimate the risk, especially during the
construction stage, and hence can offer a better price than the banks are willing to.
Refinancing of PFI deals is also common. Once construction is complete, the risk profile of a project is much lower, so
cheaper debt can be obtained. This refinancing may be done via bonds - the construction stage is financed using bank debt, and
then bonds for the much longer period of operation. In most PFI contracts, the benefits of refinancing must be shared with the
procuring authority.
See also
References
External links
Websites
Reports
Comment
- Mark Johnson, Global Finance Magazine, January 2005, [19]
- George Monbiot, The Guardian, 28 December
2004, "A Scandal of Secrecy and Collusion"
- George Monbiot, The Guardian, 30 November
2004, "Road Hogs"
- Paul Maltby, PFI Journal, 30 April 2003, Comparing cost
- George Monbiot, The Guardian, 10 March
2002, "Private Affluence, Public Rip-Off"
- George Monbiot, The Guardian, 22 January
2002, "Very British Corruption"
This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)
