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Page 2. Navigant Consulting (Europe) Ltd.. Funding PFI in a Recession 13th May 2009Rupert Stanley, Managing Director, Financial Advisory, Public Services. Page 3. . The Rise of PFITypical PFI Funding StructureAvailability
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2. Page 2 Navigant Consulting (Europe) Ltd. Funding PFI in a Recession 13th May 2009
Rupert Stanley, Managing Director, Financial Advisory, Public Services
3. Page 3 Table of Contents
4. Page 4 The Rise of PFI Started in 1992 under Conservatives - private sector design, build, finance and operate (DBFO) new or improved facilities & services
Endorsed by New Labour in 1997 and used more widely to deliver public sector investment - PFI now makes up between 10 15% of Governments annual investment in public services (Ipsos Mori Report OTF Web.pdf)
Statistics:
Over 500 PFI projects now fully operational (PPP Forum)
Over 640 PFI projects delivering infrastructure investment of over 63 billion have been signed since 1992
Unitary payments of over 245bn to 2047-48
11 projects over 500m signed with DfT, DoH, MOD, DWP (HMT Feb 09 pfi_signed_projects_list.xls)
34 signed projects in 2008 represented the lowest number since 1995 (IFSL Research, PFI in the UK & PPP in Europe 2009)
2008 survey of operational projects - Overall performance measured as good or very good over last 12 month - 73% (Ipsos Mori Report OTF Web.pdf)
Around 110 PFI projects are currently in the pipe line (03 March 2009, HMT Statement)
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5. Page 5 The Rise of PFI
(PFI: The State of the Market 2007- PUK)
6. Page 6 Why PFI? Perceived benefits:
Improved public sector procurement
Rigour of private sector
Whole life costing
Risk transfer
Robust performance mechanisms
Off balance sheet
Better VFM than Public Sector Comparator
For projects to be supported, the procuring Authority has to demonstrate:
Affordable Unitary Charge versus PFI Credit annuity & Revenue Budget Contributions
VFM on specific project
7. Page 7 Typical PFI Structure 25 year concession with a capital value of 100m results in Unitary Charge of c 12.5m, of this:
8.0m will be used to cover finance cost of debt
2.0m for equity return, for a typical IRR of 13% and tax
2.25m for facility management, insurance and lifecycle
0.25m for SPV costs
8. Page 8 Availability & Price of Debt Funding - Before Prior to mid 2007 PFI was operating in a mature and well established market
Typical players included Barclays, RBS, Lloyds, HSBC, Dexia, Nationwide, Allied Irish, Sumitomo, etc
Bond funding with monoline wrap also active for big projects
Typical debt price during:
construction 90bps above the long term Swap rates
operations 60bps above Swap
Swap rates in January 08 were around 5% + 0.1% swap credit spread
All in cost 5.70%
Active secondary market for debt syndication
Active secondary market for equity with potential refinancing gains
9. Page 9 Availability & Price of Debt Funding - After Q3 08 typical debt margins raised to 180 bps if you could find a bank!
Bond markets effectively closed due to monoline problems
But swap rates reduced to 4%
Margins have continued to increase, currently around 275bps
Increase in costs affect affordability and VFM
Even bigger problems:
Reduced availability esp for long term lending
Margin ratchets and cash sweeps to encourage refinancing
Maximum lending limits
Why market failure?
Recapitalisation
Regulatory uncertainty
Other lending opportunities at higher returns
Only doing business within existing relationships
10. Page 10 Availability & Price of Debt Funding - Reponses New refinancing clause for projects in mid procurement
More club deals 2-3 banks
Mini perm debt structures reducing maturity and forcing refinance
Return of old players EIB and now RBS
Prudential borrowing lower cost of finance than private finance
11. Page 11 Availability & Price of Debt Funding HMT Bank HMT Bank to provide liquidity
establishment of an infrastructure debt financing unit, to be called the Treasury Infrastructure Finance Unit (TIFU)
temporary support for PFI projects until market conditions improve
M25,Waste and Housing projects in procurement 13bn will be first beneficiaries
1bn in 2009/10 and 1bn 2010/11
First financial close, lending 120 million alongside EIB and commercial lenders to Greater Manchester Waste Development Authority
PPP Forum New - Treasury Infrastructure Finance Unit (TIFU):The Unitwill provide temporary support for PFI projects until market conditions improve, ensuringprojects in areas such as Education,Waste and Housing can proceed as planned. Projects in procurement with a total capital value of around 13 billion will be the immediate beneficiaries. The Government is setting aside a total of 1 billion of potential debt finance in 2009-10 and 1 billion in 2010-11.The Unit has recently reached financial close on its first project, lending 120 million alongside the EIB and commercial lenders to the Greater Manchester Waste Development Authority's PFI project.PPP Forum New - Treasury Infrastructure Finance Unit (TIFU):The Unitwill provide temporary support for PFI projects until market conditions improve, ensuringprojects in areas such as Education,Waste and Housing can proceed as planned. Projects in procurement with a total capital value of around 13 billion will be the immediate beneficiaries. The Government is setting aside a total of 1 billion of potential debt finance in 2009-10 and 1 billion in 2010-11.The Unit has recently reached financial close on its first project, lending 120 million alongside the EIB and commercial lenders to the Greater Manchester Waste Development Authority's PFI project.
12. Page 12 Alternative PFI Funding Structures can we fix it? Pension funds, esp Aviva (Norwich Union)
Corporate balance sheet
Greater funding from Local Authorities esp through capital contributions
Bonds are attempting a come back
If all else fails, LAs may convert PFI credits to capital grant
Liquidity is returning: more banks, EIB, TIFU
13. Page 13 Is PFI Still Worth Keeping? No longer Private finance (who owns the banks?)
No longer off balance sheet (although still not counted for public sector net debt)
More expensive, less affordable, lower value for money
Less attractive class of asset as less liquid asset
Still risk transfer - equity
Still whole life costing
Still private sector rigour
Still robust performance mechanism
Still low risk class of asset good performance in recession
14. Page 14 Is PFI Still Worth Keeping? Critical headlines
15. Page 15 Is PFI Still Worth Keeping? In 2009 Budget, the Government reconfirmed its commitment to PFI:
Commitment to BSF and expect 1/3 will be delivered through PFI in 2007 CSR period; move from Wave model to rolling basis.
Waste - 2bn PFI Credits
The Government remains strongly supportive of the value that private finance can bring to infrastructure procurement.