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2012 Autumn Statement: PFI reform
Practical Law UK Legal Update 2-522-8836 (Approx. 6 pages)
2012 Autumn Statement: PFI reform
by PLC Public Sector
| Published on 05 Dec 2012 • England |
On 5 December 2012, the Chancellor of the Exchequer made his Autumn Statement. That statement was accompanied by details of the government's conclusions of its review of PFI and its new approach, PF2, for involving private finance in the delivery of public infrastructures and services.
Speedread
On 5 December 2012, the Chancellor of the Exchequer made his Autumn Statement, which was accompanied by details of the government's review of PFI and its new approach, PF2, for involving private finance in the delivery of public infrastructures and services.
Comment: PLC Public Sector will be publishing further commentary on the new approach to public private partnerships and reaction to it as well, as covering further developments in this area.
Autumn Statement 2012: a focus on infrastructure
In a statement that places a focus on growth through the delivery of infrastructure, the Chancellor of the Exchequer has:
- Promised increased spending of approximately £5 billion (including an extra £1 billion to deliver new school buildings) by 2015.
- Given Infrastructure UK (IUK) a strengthened mandate and committed to increasing IUK's commercial expertise to boost the delivery of growth enhancing infrastructure projects across government. As part of this new role, IUK, together with an enhanced Major Projects Authority, will undertake a detailed assessment of the government’s ability to deliver infrastructure, reporting back by Budget 2013.
- Committed to exploring some of the suggestions made by Michael Heseltine in his report on economic growth for devolving more spending to Local Enterprise Partnerships (for more information on the review see Legal update, Heseltine review on economic growth published).
- Set out details of the government's review of PFI and its new approach, PF2, for involving private finance in the delivery of public infrastructures and services.
This update summarises the key aspects of PF2 as set out by the government.
PF2: the key reforms
The PF2 reform measures outlined by the Chancellor in his Autumn Statement cover the following issues.
Strengthening public/private partnerships through equity finance
In order to significantly strengthen public and private sector partnerships and to curb the ability of private investors to generate excessive profits, the government will:
- Look to act as a minority public equity co-investor in PF2 projects. This will enable a greater alignment of interests between the two sectors and a greater collaborative approach to improving project performance and managing risk. It has been reported that public sector stakes may rise as high as 49% but that a typical level will be 20%.
- Introduce funding competitions for a proportion of equity in order to attract long-term investors into projects before their financial close. This will widen access to difference types of investors and is expected to increase competitive tension.
The government's equity investments will be managed by a commercially focused central unit in HM Treasury, separate from the procuring authority.
Accelerating delivery
To ensure that the procurement process is faster and cheaper without sacrificing quality and competitiveness, the government will:
- Improve public sector procurement capability by strengthening IUK's mandate and by supporting departmental centralised procurement units.
- Commit that the tendering phase of PF2 projects, that is from the project tender to the appointment of a preferred bidder, will not be permitted to take longer than 18 months unless the Chief Secretary agrees an exemption. Without such agreement, funding will not be approved by HM Treasury.
- Introduce a standardised and efficient approach to PF2 procurement and publish a comprehensive suite of standard documents. These will include new procurement and contract guidance, a standard shareholders' agreement and a pro-forma payment mechanism for accommodation projects.
- Introduce additional HM Treasury checks at the pre-procurement stage to strengthen the scrutiny of project preparation and ensure that projects do not go to market before they are fully prepared.
Flexible service provision
In order to improve the flexibility, transparency and efficiency of PFI projects (which has been a problem in the past):
- "Soft" services such as cleaning and catering will be removed from projects.
- Procuring authorities will have a discretion on whether to include certain minor maintenance activities at the outset of the project. Once a contract is in operation, there will be additional flexibility to add or remove certain elective services.
- An open book approach and a gain share mechanism for the lifecycle fund will be introduced to facilitate the sharing of any surplus lifecycle funding.
- Periodic reviews of service provision will be introduced.
Greater transparency and accountability
To address the approach to transparency and accountability of PFI, the government will:
- Introduce a control total for all commitments arising from off-balance sheet PF2 contracts signed. This will form part of a wider set of reforms to the framework for managing off-balance sheet liabilities.
- Require the private sector to provide information on equity returns earned on PFI projects, which information will be published.
- Publish an annual report detailing project and financial information on all projects in which the government holds a public sector equity stake.
- Introduce on HM Treasury's website, a business case approval tracker.
- In the standard contractual guidance, improve the information provisions.
Appropriate risk allocation
Effective risk management is important in all forms of procurement and the government states that this will particularly be the case for PF2 contracts. To improve value for money under PF2, the government has proposed greater management of public sector risk, such as the risk of additional capital expenditure arising from:
- An unforseeable general change in law.
- Utilities costs.
- Site contamination.
- Insurance.
Standardisation of PF2 Contracts
The government has also published draft guidance for PF2 (Standardisation of PF2 Contracts). The draft guidance sets out the approach to be taken to:
- Structuring PF2 contracts.
- Allocating risks between the public and private sector parties.
- Promoting a common understanding of the new model in the market.
New standard forms
The government has indicated that drafts of the following forms will be published shortly for consultation:
- Standard form services output template.
- Pro forma payment mechanism.
- Shareholder arrangements.
Comment
PLC Public Sector will be publishing further commentary on the new approach to public private partnerships and reaction to it, as well as covering further developments in this area.