PPPs and PFIs
Public Private Partnerships (PPP) and Private Finance Initiatives (PFI) are sometimes used synonymously but they are fundamentally different and it is important to understand how and why.
CURSHAW’s focus is on UK PFI contracts and in particular their expiry. These are more than just complex commercial contracts. Behind each one, an expiry will involve the private sector handing back to the public sector contracting authorities critical operational infrastructure such as hospitals, schools, roads, prisons, defence assets, key operational properties and much more. Each asset is unique and will need to be handed back in the right way, in line with the contract and to appropriate standards, to ensure ongoing post-PFI operation. In addition to this already complex task of commercially and operationally exiting their expiring PFI contract, each PFI contracting authority will also have to define, procure and stand-up a robust, sustainable and value-for-money replacement operating solution, and then transition seamlessly between the two. The proverbial “double-whammy”.
What is a PPP?
A Public Private Partnership (PPP) can be summarised as collaboration between the public and private sector, in order to deliver public infrastructure or a service.
PPP’s originated due to the demand for increased investment in public infrastructure, but also as a method of improving delivery of services, without the need for privatisation. These partnerships differ from conventional public procurement, as they specialise in more long term, output-based services. As a result, the partnership aims to utilise private expertise for not only the asset’s construction, but also its long term operation and maintenance, with the end goal of reducing overruns, and achieving value for money.
The types of PPPs
Public Private Partnerships can exist in many different forms. The most common examples include Joint Ventures, Strategic Infrastructure Partnerships, Integrators, Concessions, and Private Finance Initiatives (PFI). It's useful to follow this principle; all PFIs are PPPs, but not all PPPs are PFIs! These terms can also vary depending on jurisdiction. A PPP in the Netherlands may be referred to as a PFI/PF2 in the UK, or a P3 in the United States.
What makes a PFI different from most PPPs?
The most notable difference between a PFI and conventional PPPs, is the manner of the financial agreement. A Private Finance Initiative will utilise debt and equity finance provided by the private sector, in order to pay for upfront capital costs. In return, the Public sector will pay yearly instalments, plus interest, throughout the contract's life, known as unitary charges, to the private partner for their construction, maintenance and operation of the asset. This financial format is not required in other PPPs, and thus they have more flexibility for structuring contributions.
Furthermore, in order for a PPP to be classed as a PFI, a Special Purpose Vehicle (SPV) must be in place. These SPVs will not only enter into the contractual arrangements with the public entity, but also engage financially with private shareholders & financiers.
How are public sector contributions funded in a PPP?
In order to answer this, we must assume that ‘funding’ is defined as the funds obtained in order to pay for project costs, DURING the project's life. This differs from ‘financing’, which is associated with the upfront capital costs for the project.
Contributions of public sector funding for PPPs are primarily through two formats:
General Budget
User Charges
The general budget mechanism involves raising funds via the collection of taxes (income, VAT, emissions etc.) and other public incomes. It’s otherwise known as the “indirect funding stream”, due to its lack of ring-fencing and correlation between the fund, and the specific project. This format is usually employed for PFIs, as the majority of these projects will follow an “availability-based payments”,such as prisons and head office, that don't normally generate a clear revenue stream. Therefore, the lack of ring fencing in the general budget, is an appropriate funding mechanism.
In contrast, the user charge mechanism is another funding mechanism that is primarily employed for concession based PPPs. User Charges are a more direct funding option, in which the fees collected from users and secondary services associated with the project, will be used to cover the project costs. Notable examples of this include road tolls, in which drivers using the road will contribute towards the construction of a new bridge or tunnel.
Private Finance Initiatives in the UK
The Private Finance Initiative (PFI) was launched in the UK in 1992 as a route by which public sector projects could be financed, delivered and operated by the private sector. In the subsequent 26-years, before the Government announced in 2018 that PFI had run its course as a financing option, over 700 PFI contracts were established, with a capital value of £57Bn in nominal terms and total lifetime repayments of an estimated £290Bn. Our interactive data available here shows the different types of PFI their value and the contracting authorities and Sponsor Departments involved.
PFI Contracts usually serve for around 25 to 30 years, although in the UK’s National Health Service, they have been seen to stretch up to 40 years. During this time, the private consortium (usually comprising a Special Purpose Vehicle (SPV), SPV Manager and Facilities Management (FM) supply chain) will provide certain services for the asset that would normally be undertaken by the public sector (such as the cleaning of hospitals, and the catering for prisons). The private consortium will make the returns on these services, through long term repayments, plus interest from the government.
