Government sets out "belated" investment strategy for public sector role in PF2 projects

Projects expert Jonathan Hart of Pinsent Masons, the law firm behind Out-Law.com, said that the consultation on the "crucial" draft Shareholders' Agreement (SHA) was a "welcome, if belated step forward" for the replacement to the private finance initiative (PF2).

PF2 will replace PFI as the Government's main funding mechanism for public infrastructure projects. PF2 will allow the public sector to take on the role of a minority shareholder in a project, allowing it to recover a share of the profits in the same way as private sector investors.

"The SHA is going to be at the heart of the different way in which PF2 projects will be run, when compared to their PFI predecessors," Hart said. "Under the new model, there will be active public sector participation in the PF2 project companies, under the leadership of the specialist Treasury Unit. The SHA which is to be consulted upon will provide some welcome detail as to how this may operate in practice."

Announced at the end of last year, PF2 is intended as a "faster, more transparent" approach to using private finance to fund public infrastructure. PF2 projects will be run by joint venture companies, into which the public sector will be able to invest on the same terms as the private sector. Each company will be majority owned by the private sector, with the Government's stake limited to 49%.

The decision to invest public sector equity will be taken by an Investment Committee made up of senior Treasury officials and two independent members. This committee will examine bids to make sure that they meet government criteria, which will be published shortly. Public sector shareholdings will then be managed by a new PF2 Equity Unit, which will also evaluate prospective investments and regularly review their performance. The head of the PF2 Equity Unit will also sit on the board of PF2 project companies.

The draft SHA sets out the proposed terms of the Government's investment. It includes details of voting arrangements and the right of the public sector to appoint a director to the joint venture company. It also sets out the categories of information private sector shareholders will be required to disclose to the PF2 Equity Unit, to enable it to prepare an annual report on the public sector's current investments.

"Taking a share of equity in these projects means a greater voice for the public sector, stronger partnerships with the private sector and increased disclosure to the taxpayer," said Lord Deighton, Commercial Secretary to the Treasury. "It will also make us better clients. This is an important step forward and we must continue this momentum."

The Government had previously announced that the privately-financed element of the Priority Schools Building Programme (PSBP) would be the first project to be funded using PF2. The Education Funding Authority (EFA) is due to procure 46 schools in five batches over the next 12 months, with a total funding requirement of approximately £700 million.

Projects expert Jonathan Hart said that the timing of the consultation, which closes at the end of August, "may raise some interesting questions" for the procurement of the first batch of PSPB schools, which began in June.