8. How much impact has the financial crisis had on launching new Private Finance projects? Is the crisis likely to have a permanent effect on the Private Finance market?
PFI debt is no different: As a general point, the financial crisis has had an impact which has been felt across the whole economy, including the PFI sector. The impact on the PFI sector is no more or less than the rest of the UK's economy. In recent months, the finance market has steadied-credit risk is becoming less of a concern and pricing, liquidity and terms are stabilising, and this has flowed through to PFI financings.
Help rebuild the economy: The use of PFI is a key tool for the Government in its endeavours to stabilise and rebuild the economy as it permits the leveraging up of limited Government resources to bring more projects to market, creating more economic activity and jobs than if those resources were deployed in traditionally procured projects.
Facilitating greater investment: There is a latent demand in the private sector for public sector infrastructure investment, in the form of life insurance and pension funds looking for long-term stable investments, which could be accessed more effectively by the public sector if such opportunities were available for investment. It would be helpful if the Government could facilitate the meeting of that demand by revising the regulatory provisions regarding the proportion of those funds permitted to be invested in infrastructure.
Government can also further assist the market by being clear on the priorities it has for infrastructure investment and development. If the Government is pushing a particular sector forward (or parts of the sector, recent examples being waste and Building Schools for the Future), the private sector will follow. The establishment of The Infrastructure Financing Unit (TIFU) by the Treasury is a good example of this. It has facilitated the achievement of financial close of various projects simply by its existence-to date one project has utilised TIFU funds (Manchester Waste), but other projects' successful closing has been due in some part to the backstop that TIFU provides, thus allaying funding concerns that might have otherwise stalled deals.
Some impact on new launches: Overall, the financial crisis has delayed, but not prevented, the progress of some larger PFI deals, as compared with for example the M&A debt market where the credit crisis had a much more dramatic and sustained impact on the availability of debt.
More particularly, the market for smaller PFI deals has remained liquid since the financial crisis, albeit that senior debt interest margins have increased (though these have largely been offset by low interest rate swaps) and there has been a reduction in the volume of long tenor debt available, although there is still sufficient supply in the market to support the funding of the current UK PFI pipeline.
Larger, more complicated deals have felt some impact-there is a question as to whether there is enough liquidity in the market to fund large deals, particularly as the project bond market has stalled due to the impact of the financial crisis on the monoline insurers who had played an integral role in bond financing structures. Again, the availability of long tenor debt for very big ticket projects (such as M25) or projects with volume risk (such as waste PFI) has been affected, resulting in cash sweep arrangements being introduced to reduce the debt tenors (but at no extra cost to the public sector). These larger projects have also benefitted from recent increases in lending activity by the European Investment Bank and, as already mentioned, from TIFU's presence as a backstop if there is a shortfall in private funding due to the financial crisis. TIFU has given procuring bodies the confidence to press on with deals in uncertain markets-it allows them to concentrate on selecting a preferred bidder on the basis of the quality and deliverability of the bid, rather than being distracted by concerns regarding the credit of the bidder's funders, or their liquidity. TIFU's presence has also helped keep a control on the cost of funding.
No permanent effect: Private finance has always had to adapt to changing markets-it has invested in infrastructure for many years and across many sectors, and has evolved as necessary to meet changing requirements, and will continue to do so. For example, though the project bond market is currently very limited, it is expected to adapt to the departure of the monolines and become available again in some fashion.