Is PFI about to be reborn?

Just when you might have been excused for imagining that the discredited Private Finance Initiative (PFI) was dead as a construction procurement route, up it pops again.

It is increasingly obvious, as we have said before in CL, that the government’s ambitious £600 billion National Infrastructure Pipeline is unlikely to be deliverable without the use of private funding. PFI was ruled out as an option after several high profile failures and reports from Parliamentary select committees highlighting the problems and expense.

Alternative ways of bringing in the funds available from lenders like insurance companies and pension funds were being sought and various proposals involving hybrid public/private partnership type arrangements mooted. But it looks like little has emerged yet as a serious replacement for PFI.

An excellent opportunity to try something different has just been ignored, with the Birmingham City Council highways PFI. Launched in 2010, this was to be a 25 year, £2.7 billion collaboration between Amey and the council, but last March Amey agreed to pay the council £215M to get out of the contract. The failure of this scheme has possibly permanently tarred PFI in the minds of at least some contractors and funders.

Undaunted however, Birmingham City Council has now invited bids for a new contractor to deliver the remainder of the original 25 year scheme. More balanced risk between the parties is promised along with improved governance, with a five week prequalification phase starting off a nine month tender process.
In London, Transport for London (TfL) has said it may increasingly turn to private finance to pay for future infrastructure schemes. Falling passenger revenues due to Covid has created new funding challenges. Government support will be required to help get investment flowing, according to transport policy specialists.

TfL’s has recently been forced to rely on emergency Government funding to keep services running, and some flagship projects including Crossrail 2 and the Bakerloo Line Extension have been shelved. London’s Mayor has warned in recent weeks that failure to strike a deal could see the capital’s transport network enter a state of ‘managed decline’.

TfL’s lead sponsor for major projects, Andrew Lunt, told a Policy Forum for London event earlier this year that one major scheme remains unaffected by TfL’s financial crisis – the privately financed Silvertown Tunnel. Mr Lunt said it is going ahead against a background of financial constraint precisely because it is privately funded. Its 25 year commercial arrangement is based on the ‘PF2’ model – which has since been scrapped by the Treasury.

Construction consortium Riverlinx raised private capital up front to design and build the tunnel, and TfL is expected to pay back the consortium using revenue from a new a toll on road users passing through the Silvertown Tunnel and nearby Blackwall Tunnel. “I think we have got a really good commercial model with a clear mechanism for paying back the cost of private finance over that long term period,” said Mr Lunt.

However he also noted that until TfL receives further clarity regarding long term funding support from the Government, “then clearly we can’t have meaningful discussions about what private sector investment might be needed in what specific projects and in what specific way”.

It’s time for government to take an initiative and decide how exactly private funding is to be attracted to support its plans.

Nick Barrett