Governance Issues in PPPs - Policy Responses to PPPs in the UK

Edward FarquharsonPPP Days 2010 Manila

22-23 March 2010

Agenda

• Recent policy responses: TIFU

• Future policy responses: Infrastructure UK

Market Capitalisation of UK Banks

£0

£20

£40

£60

£80

£100

£120

£140

Barclays RBS Lloyds/HBOS HSBC

Jan-07

Nov-08

Nov-08 includingexternal support

Mar-10

Short term consequences for PPP projects

Recapitalisation of banking system

Weak macroeconomic climate

Re-thinking of safeguards against risk

• Sticky pricing

• ‘Club’ deals rather than ‘Syndication’

• Shorter tenor

• Bond financing remains difficult

VfM

Timetable

Refinancing

Affordability

Uncertainty

Possible short-term funding fixes

• Increased multilateral lending (EIB)• Public sector capital contribution• Contractor Loan/Corporate funding• Public Authority / Department Loan• Debt underpinning by public sector

But:• Appetite and availability• State aid• Vires• Risk transfer and value for money

The Infrastructure Finance Unit (TIFU)

• £1-2 billion ‘fund’ established in March 2009– To help projects reach financial close – Arms-length unit within HM Treasury– Credit committee and other governance

• Loan on commercial market terms– Pricing– Voting rights

• Access via public sector financial adviser and PFU sign off– Funding not available or– Not available on appropriate terms

• Greater Manchester Waste deal closed with TIFU loan of £120mm

• PPP model will survive but alternatives are being explored

• Liquidity is returning, but recapitalisation will take time

• Capital markets investors are looking for a way back into the sector– Unwrapped bonds

– Subordinated debt funds

– Senior debt funds

• Pricing is unlikely to revert to 2007 levels and some projects may become unaffordable without innovative solutions

What does this mean in the longer term?

UK Infrastructure Challenge

• £500bn over the next 10 years

• 50% in energy markets

• 30% Public Sector investment

• 70% Private Sector investment

• Regulated markets coming under strain– Low carbon agenda

– Social policy

Capturing the benefits of PPP

• Extended risk transfer

• Whole life cost approach

• Set aside budgets

• Output based contracting

• Management of supply markets

Wide Range of Procurement Models

Current system challenges1

• Need for longer term vision for national infrastructure requirement

• Avoid investment occurring in an ad-hoc way.

• Avoid responsibilities and accountabilities being silo-ed

• Need for better knowledge of vulnerabilities from interdependencies.

• Better resilience against systemic failure

• New challenges: e.g. climate and socio-demographic changes.

• Investment capital and supply chains are limited and competed for globally.

1 Council for Science and Technology report June 2009

IUK - Rationale

• Establish a body with a clear responsibility for developing and supporting delivery of an infrastructure strategy for the UK.

• Bring together TIFU, HMT’s PPP policy team, the IUK set up team and PUK’s core project/programme delivery capability.

• Provide a focal point for infrastructure investors and industry, able to tackle cross-cutting policy issues.

• Help ensure value for money for Government investment in a fiscally constrained environment.

• Achieve efficiencies by reducing interfaces whilst retaining professional delivery capability and deploying it more effectively.

• Continue to address the commercial skills gap in Government.

PRIVATE

REGULATED

CENTRAL PUBLICSECTOR

LOCAL PUBLICSECTOR

INFRASTRUCTURE SERVICES FUNDING ASSURANCE

PUK

INFRASTRUCTUREUK

HMT

PUK

LO

CA

LP

AR

TN

ER

SH

IPS

OGC

TIFU

UKFI SHEx

LOCAL PARTNERSHIPS

SHAREHOLDINGS

Current Institutional Structure

PRIVATE

REGULATED

CENTRAL PUBLICSECTOR

LOCAL PUBLICSECTOR

SHAREHOLDINGS INFRASTRUCTURE SERVICES FUNDING ASSURANCE

UKFI

INFRASTRUCTURE UK

LO

CA

LP

AR

TN

ER

SH

IPS

OGCSHEx

LOCAL PARTNERSHIPS

Future Institutional Structure

Structure and leadership

• Part of Treasury but with a separate identity and presence in the market.

• Chaired by Paul Skinner (Chairman, Rio Tinto, 2003-2009) and led by James Stewart.

• Supported by an Advisory Council comprising independent experts and Permanent Secretaries from relevant Departments.

• Reporting to Lord Davies and Treasury Ministers.

Core activities

• Strategy: plan, develop and implement a strategy for UK infrastructure.

• Finance: assess options to attract additional capital to finance UK infrastructure; assume TIFU’s PFI funding role.

• Policy: lead on PFI/PPP and broader infrastructure delivery policy.

• Prioritisation: advise Treasury teams and Ministers on spending priorities.

• Scrutiny: support Treasury approval processes.

• Market leadership: Government’s focal point for infrastructure investors, developers and operators.

• Support to departments on delivery of major projects/programmes.

www.partnershipsuk.org.uk

edward.farquharson@partnershipsuk.org.uk

+44 (0) 207 273 8040