|Private Finance Initiative|
|The A1(M) between Disforth and Darrington is an example of a PFI scheme|
|Pictures related to PFI|
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|Department for Transport • Connect Roads|
|DBFO • PPP • Shadow Toll • Tolls|
Private Finance Initiative, often shortened to PFI, is a method used by governments to fund large schemes requiring large capital expenditure, such as for building hospitals, schools and, in the interests of SABRE, roads. The advantage for the government is two fold; they can spread the cost of large capital schemes over the long term and they remove the risk of construction onto the private sector.
In the Republic of Ireland, these schemes are usually called Public - Private Partnerships, or PPP schemes.
Types of Contract
There are a few different ways that these contracts were used, although the majority of these were split between a Capital part, often the construction of a road or roads, and a Maintenance part for the project after it has been built. Some schemes were also used solely for the capital part, and others solely for the maintenance part.
Every scheme has a common theme, which is the use of a Special Purpose Vehicle (SPV), which is usually a partnership between a construction firm (or multiple firms), a management firm and a private equity firm. In a normal contract, around 90% of funds will be sourced from private equity firms, and 10% would come from the partners of the Special Purpose Vehicle.
For roads in the UK, the most common version of PFI contract is a DBFO contract. These contracts have four elements:
- Design: Detailed design of the final scheme after the preferred route has been announced.
- Build: Construction of the road or any improvements.
- Finance: Financing the scheme, using Private funds and moving the risks onto the private sector.
- Operate: Maintenance and ongoing servicing of the roads that are covered in the contract.
The DBFO contracts are generally signed on 15 year terms, with clauses allowing their extension if needed. They can also include the maintenance of lengths of road that were not part of the improvement. A good example of this is the A30/A35, which had a new dual carriageways built at or near either end of the contract, but the A35 between them that had not been upgraded was included in the maintenance part of the scheme.
In order to fund the contract, there is a funding mechanism to manage the costs of the contractor. In the UK, this is usually done as a Shadow Toll, where the traffic flow is counted and a fee levied on the government for each vehicle that has used the road in the period.
DBFO contracts are not just limited to Trunk routes. The A130 through Essex is managed through a DBFO scheme. Transport for London manage the A13 through London via a DBFO contract, although that was initially instigated while is was a trunk route.
The Republic of Ireland have DBFOM contracts, which work in much the same way as DBFO schemes do in the UK.
Some local authorities use the PFI to fund road maintenance schemes, which can include resurfacing, street light replacement, sign replacement and cleaning and pavement renewals. Two of the biggest schemes are the Sheffield Highways PFI and Island Roads, who are maintaining roads on the Isle of Wight.
Concession schemes are those where a toll is applied to a new road. They are quite common in the Republic of Ireland, where sections of the M1, M4, M6, M7, M8, M50, the entire M3 and several other National roads are tolled. In the UK, they are usually used at major river crossings, including the Severn and Wye bridges and the Second Severn Crossing. A new scheme is currently under construction near Runcorn, providing a new crossing of the river Mersey and is called the Mersey Gateway Bridge.
The only long distance tolled road in the UK is the M6 Toll, which forms the northern side of the Birmingham Orbital. There was due to be an extension to the M6 Toll, all the way to Stoke-on-Trent, although this never materialised.
Concession agreements are normally written in the same style as DBFO contracts, although the funding mechanism in this case is a toll levied on its users and can last for a much longer term.
The Dartford Crossing is often confused as a road toll as it was under a DBFO contract. However, when it passed back into public ownership the maintenance fees are actually levied as a Congestion Charge on its users.
Under increasing pressure from critics and a search to drive costs down while maintaining development, the Scottish Nationalist Party abolished any new PFI scheme's when the gained power in the Scottish Parliament in 2007 and replaced them with a new Non-Profit Distributing, or NPD, model. This has two key elements. First was the creation Scottish Futures Trust, set up to monitor and advise on the best use of public funds for key infrastructure projects and owned by the Scottish Government as an arms length Publicly owned Company. Part two of this was the removal of the equity investment from the partners in the SPV. The advantage of this is that any excess money over and above what is needed to pay the construction loans is saved within the SPV and is paid out to a designated charity towards the end of the contract.
As said earlier, there are two major advantages for PFI schemes.
Moving of Risk
The risk involved in PFI and PPP schemes is moved onto the private sector as it is the private sector that has to fund the scheme, meaning that any costs over and above those built in as contingency have to be met by the private sector. This means that the government do not have to pick up the bill when things go wrong on site, and this saves them money in the long term.
There is also a risk that traffic volumes increase to a point where the infrastructure can no longer cope. This is allowed for in the contracts of DBFO schemes, as if this happens the contractor has to improve the road to meet the standard that would cope with that level of traffic. The most obvious scheme where this was used is the A1(M) between Junctions 14 and 16, where the road is D4M instead of the usual D3M (as it is south between Alconbury and the A14(M), and north of Junction 16). This was partially due to schemes either side of this stretch were due to be built to bring the whole A1 up to Motorway standards, but this plan was soon shelved. This left the 4 lane wide section of A1(M) look rather isolated and empty, even at peak times.
Spreading of Cost
PFI schemes have the advantage of being paid for in smaller, more regular payments which are paid over the long term. In times of economic unrest this can be seen a easy solution to continue major capital schemes, although funding these schemes in the private sector can also be more difficult as people generally do not like to invest in these times.
One other advantage is that lots of schemes can be put forward at one time, meaning that lots of improvements can be started at the same time instead of having to wait for the funds to be available to progress each scheme from Public Sector funds.
Also, while highly controversial, schemes like the M6 Toll have achieved their objective in removing traffic from the M6 through the West Midlands with limited public expenditure.
PFI schemes are often seen by the public as ways for the private sector to profit off of the public sector. The main reason for this was how the schemes were financed early on. The majority of risk within a DBFO project is where the contractor has to raise the finance for the scheme to build it. As the majority of the investment goes into the construction, and because it is the time when the most can go wrong, it is expensive to take out a loan. At the end of the construction phase, the contractors could refinance the loan a get a better rate of repayment as the majority of the risk had been passed. However, the contract with the government was still for the amount of the original repayment terms and so the partners in the SPV could draw the excess cash from the SPV as dividends. The contracts were re-worked after this became apparent, and any future contracts were made with this in mind.
The Scottish government try to counteract this by using a Non-Profit Distributing model, which means that any profits made from the scheme could not be used to pay dividends to the investors, and is instead distributed to a designated charity as detailed above. However, recent academic studies are putting the benefits of this into doubt as there are not as many funding sources as initially hoped, meaning that interest rates have been kept artificially high due to the lack of competition.
However, the contracts in the long term are still more expensive than funding the project through public funds. While it is a good way to get lots of schemes built quickly, the long term funding of these contracts makes them less popular in the United Kingdom than they once were. However, the Republic of Ireland still uses these contracts and are currently using them to build the majority of the motorways across the country.
There are also criticisms of Concession schemes, like the M6 Toll and Skye Bridge. The critics of the original Skye Bridge contract believed that the prices were too high for the locals. Once built, the bridge had no competition and as such had a monopoly on the crossing to Skye as no other ferries could remain competitive. As a result of many protest the Scottish Government bought the bridge from its owners in order to lift the tolls.
The M6 Toll on the other has similar issues for different reasons. It's competition is all free, meaning that people see the toll as an unnecessary expense, especially as the M6 and A50 provide the same service, especially after recent and planned improvements on both routes. Therefore, to remain profitable it has to keep its prices high. The theory is that if there was another tolled alternative to the M6 Toll there would be competition between the two routes, lowering the costs for users, although this is highly unlikely and will prove very controversial if such a route were suggested.
The UK Government released a paper in 2012 introducing their new approach to Public-Private Partnerships, called PF2. This is designed to tackle the concerns of the public to drive greater efficiency and better competition within the private investment element of the projects. They have also reassigned the different tasks that can be undertaken in a PF2 contract, like removing cleaning duties from the contracts to introduce better competition for those smaller jobs. They are also allowing greater discretion and flexibility in the contracts, meaning that certain tasks can be moved between Public and Private sector.
The key objectives of the review are as follows:
- Equity: To strengthen significantly the partnership between the public and private sector
- Accelerating delivery: To ensure that procurement is much faster and cheaper than in the past
- Flexible service provision: To improve the flexibility, transparency and efficiency of services
- Greater transparency: To transform the approach taken to transparency
- Appropriate risk allocation: To improve value for money there will be greater management of risks by the public sector, including the risk of additional capital expenditure arising from an unforeseeable general change in law, utilities costs, site contamination and insurance.
- Future debt finance: The financing structure for PF2 will be designed to enable access to long-term debt finance and, in particular, the capital markets.
- Delivering value for money: Develop and consult on guidance which will replace the existing Value for Money Assessment Guidance.
While the number of projects that will be built under PF2 is still unknown, and the longer term effects of the contracts are yet to be seen, it can be assumed that a lot of the projects announced in new Road Investment Strategy will be built using PF2. There is speculation that scheme's like the A303 expressway will be built under this program and a pipeline of Road infrastructure investment that is suitable for PF2 was expected in Spring 2017.
Notable Highway PFI Projects
- Skye Bridge (£93 million) - Skye Bridge was the first PFI road scheme in the UK
- Queen Elizabeth II Bridge (£160 million)
- Sheffield Highways PFI (£2 billion)
Current English Trunk Road Contracts
|DBFO Area||Area Name||Roads Include||Commencement Date|
|25||A69 Newcastle to Carlisle||A69||April 1996|
|26||A168/A19 Dishforth to Tyne Tunnel||A19, A168, A174, A1053||February 1997|
|27||M1-A1 Link (Lofthouse to Bramham)||M1, A1(M), M62||April 1996|
|28||A50/A564 Stoke tp Derby||A6, A50 (formerly A564||July 1996|
|29||A1(M) Alconbury to Peterborough||A1(M), A14(M)||April 1996|
|30||M40 (J1-15) Denham to Warwick||M40||January 1996|
|31||A417/A419 Swindon to Gloucester||A417, A419||April 1996|
|32||A30/A35 Exeter to Bere Regis||A30, A35||October 1996|
|33||A1 Darrington to Dishforth||A1(M)||March 2003|
|34||A249 Stockbury (M2) to Sheerness||A249||February 2004|