Government to become shareholder in "faster, more transparent" privately financed projects

Dubbed 'PF2', the replacement to the controversial private finance initiative (PFI) will allow the public sector to recover a share of the profits made by projects in the same way as private sector investors.

The £1.75 billion privately financed element of the Priority Schools Building Programme, which will see rebuilding and renovation work on the 219 schools in the country in the worst condition, will be the first project to be procured under the new arrangements. However, the Ministry of Defence and Department of Health are currently assessing the suitability of PF2 for upcoming projects.

In a document  (105-page / 962KB PDF) published alongside the Chancellor of the Exchequer's Autumn Statement, the Government said that the new arrangements would "continue to draw on private finance and expertise" while at the same time "addressing past concerns with PFI and responding to the recent changes in the economic context".

Other changes will see an 18 month time limit introduced for negotiating projects, while project operators will have to set out profits and revenue in the form of an annual statement. Investors with "long-term investment horizons", including pension funds, will be encouraged to invest in projects at an earlier stage.

PFI was introduced in the 1990s as a way of using private funding to pay for major infrastructure projects such as roads, prisons and schools. In a PFI agreement, the private sector obtains finance to design, build and operate a facility for the benefit of the public. In return the public sector will grant its private sector partner a long-term contract to run the facility, and will pay a monthly fee over the life of the project to repay the loan.

Announcing a review of PFI last November, the Chancellor said that the procurement process had been criticised for being too slow and poor value for money for the taxpayer. PFI contracts have also been criticised for being insufficiently flexible during the project's operational period.

Although projects procured under PF2 will still be run by private companies, the public sector will have "additional flexibility" on service contracts while cleaning and catering will be excluded and will instead be procured separately through shorter-term contracts. PF2 commitments will still be excluded from the Government balance sheet, however a "control total" for all outstanding commitments will be included as part of the Whole of Government Accounts.

The Government will be able to take a stake of up to 49% in projects procured under PF2, with the investment to be managed by a commercially-focused central unit located within the Treasury. The unit will be managed by individuals with the appropriate skills to oversee the investment and make commercial decisions, while the investment will be made on the same terms as those agreed by the private sector for a particular project.

The 18 month deadline for successful procurement will apply from the issuing of a project tender to the appointment of a preferred bidder by the procuring authority. If this deadline is not met, funding will not be approved by the Treasury unless the Chief Secretary has already granted an exception to the project. To further streamline the procurement process, the Government will publish a suite of new standard documentation including guidance, a standard shareholders' agreement, a standard facilities management service output specification and a pro-forma payment mechanism. It has published draft guidance (400-page / 3MB PDF), while other documents will be published for consultation shortly.

Infrastructure law expert Jon Hart of Pinsent Masons, the law firm behind Out-Law.com, said that although there was a "well established model" for public-private sector joint ventures in terms of local government regeneration schemes, the use of these to finance the delivery of new infrastructure would be a "big step forward" for the UK.

"This kind of 'institutional PPP' model is common in certain European jurisdictions, but here in the UK may require a significant change in approach for private companies and a potential further obstacle for attracting in long-term debt from those few banks still active in the market," he said.

He added that a new policy and structure would not "unleash new funding sources" on its own.

"If PF2 can help detoxify the PFI brand then that is to be welcomed," he said. "It would not appear, in the short term at least, to provide any greater likelihood for getting the wheels turning in the hard-pressed infrastructure sector."