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The end of PFI, the beginning of PF2

projects portrait1Rob Hann looks at the latest developments in relation to PF2 and what it means for local authorities and other public bodies.

In early July 2013 , the Treasury launched a consultation exercise on the terms on which the Government will invest public sector equity. The consultation document and draft Shareholders’ Agreement (and other legal documents included in the consultation pack) are now available on  until 21 August 2013.

To recap on PF2 - December 2012 saw the official close of perhaps the longest running public contracting programme ever and its replacement by a new approach to public private partnerships to be known henceforth as ‘PF2’.

The private finance initiative (the PFI) was originally launched under John Major’s Conservative Government of 1992 with the aim of increasing the involvement of the private sector in the provision of public services. The Labour governments of Tony Blair and then Gordon Brown, enthusiastically adopted the PFI approach. There followed a huge expansion of the PFI programme under labour and across Government and local government.

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The PFI was introduced in order to engage the private sector in the design, build, finance and operation of public infrastructure, with the aim of delivering good quality and well maintained assets that provided value for money for the taxpayer. Over 700 projects have reached financial close, securing private sector investment of around £55bn.

Additional funding was made available to local authorities promoting and developing major projects to an approved standard. For local government in England, the PFI became a major, central government sponsored programme spanning, at its peak, the majority of council services including street lighting, schools, joint service centres, libraries, waste infrastructure, housing and social care initiatives. In more recent years, even under Labour, the flow of PFI funding eventually slowed to a drip before being terminated completely for new projects by the Coalition Government.

In December 2012, HM Treasury announced a new coalition policy named PF2 which would replace the PFI and would build on its foundations but also would learn from the mistakes which had been made in the past with PFI projects.

One of the main differences between the PFI and PF2 going forward is that central government now expressly encourages equity participation as a minority co-investor in new schemes. Although some forms of PFI (namely those carried out under the NHS LIFT and Building Schools for the Future programmes) did utilise a PPP joint venture company structure as a delivery vehicle, the PF2 approach goes much further.

In order to strengthen significantly the partnership between the public and private sectors, the Government is looking to act as a minority equity co-investor in future projects. According to the publication from HM Treasury, this will enable:

  • greater alignment of interests between the public and private sectors, and a more collaborative approach to improving project performance and managing risk;
  • better partnership working, with the public sector having greater visibility of project information and more involvement in strategic decision making;
  • more transparency, including in relation to the financial performance of the project company, through its project company board membership; and
  • value for money to be improved as, subject to the appropriate management of project risk, the public sector will share in the on going investment returns, reducing the overall cost of projects to the public sector.

Such equity investment will be managed by a central unit located in the Treasury and separate from the procuring authority. The Government announced the privately financed element of the Priority Schools Building Programme (PSBP) would be the first to implement the reforms. Forty six schools in five batches will be rebuilt using PF2, with a total funding requirement of approximately £700m. Procurement for the first batch of schools was launched by the Education Funding Authority in June 2013 and the remaining batches will follow over the next 12 months.

In local government, the PFI remains relevant for those authorities who are now managing long-term contracts and relationships. In times of austerity there are incentives to work together with the private sector providers to deliver best value and drive out new, better ways of working to meet current objectives from operational contracts.

There is also evidence of interest in the PF2 ideas of equity involvement in joint venture vehicles. Such partnerships are already a tried and tested route but where the local authority itself takes equity (not a central government department or agency).

Whether PF2, as it is described in HM treasury’s guide, becomes a more popular choice for local authorities in future depends to a degree on whether PF2 provides access to otherwise unavailable or scarce new funding to pay for public infrastructure projects. Will local authorities welcome HM Treasury involvement and participations in local projects? Will they have any choice if they wish to deliver major infrastructure projects and need some form of central government sanction or funding?

Each PF2 company will be majority owned by the private sector and the government will invest on the same terms as the private sector. In July 2013 the Government released for consultation further tranches of PF2 model form and guidance documents. The publication of the draft Shareholders Agreement (Shareholders Agreement Consultation Draft’) sets out the proposed terms of the government’s investment. It includes details of the voting arrangements, the government’s right to appoint a director to each company and increased information other shareholders will be required to disclose to provide greater transparency to the public. These documents will form the basis of the final legal documents to be used by public sector bodies as part of their procurement documentation when they set up PF2 contracts.

The consultation period ends on 21 August 2013.

Some authorities may also see the benefits of utilising the knowhow and templates being developed under PF2 to adopt and adapt to their own local circumstances to develop PPPs and joint ventures outside of the PF2 HM treasury equity model. Either way, these are interesting times. Those who have long memories will realise local government has come full circle with regard to setting up, participating in or having interests in companies.

My employing organisation, Local Partnerships LLP, itself a joint venture owned equally by HM Treasury and the Local Government Association, is working with Government Departments, Infrastructure UK and with individual local authorities to scope the opportunities for new investment in public infrastructure offered by this exciting new initiative.

Rob Hann is Director Legal Services at Local Partnerships LLP. He can be contacted by This email address is being protected from spambots. You need JavaScript enabled to view it.. Rob is also author/editor of Local Authority Companies and Partnerships.

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