Equity

The table below summarises the extent to which equity has made the difference which the architects of PFI hoped for.

The key points are:

•  As with senior debt, the finance providing role of equity has not been critical to achieving the public policy purposes of PFI.

•  However, its role in gluing together the integration of design, construction, operation and maintenance skills has been important. While a DBMO model may achieve some degree of integration, it does not pin long term financial responsibility or incentives on the contractor to make the integration work in practice (see Exhibit 3, page 17). It is the equity provider who takes long term risk on the integration plan working. The extent of the integration benefit varies from one kind of project to another. Potential benefits will be the greater to the extent that there is a significant operational, maintenance or asset replacement element in a project; and to the extent that the way this element is provided depends on the original design and construction. A further indicator of potential integration benefits is where the original design is influenced by the bidder's confidence in their ability to operate the project in a particular way. Classic examples of projects with high potential integration benefits are therefore those involving process plants of one kind or another (e.g. water treatment plants; waste processing facilities).

•  The long term financial exposure of equity to the success of a project should provide strong incentives to manage the long term performance of the project, and to maintain good and trusting relationships with the client. There is now a small but growing body of evidence to suggest that public sector clients are generally satisfied, or better, with the performance of their PFI contracts. The Treasury's report, "PFI: strengthening long-term partnerships" ("SLTP") shows that, according to contract managers, of the 100 PFI projects looked at, 96% were performing at least satisfactorily and 66% were performing to a good or very good standard. It also shows that PFI performance improves with the age of the PFI (70% of PFIs operational before 1999 were rated good or very good, compared with 63% of those that became operational in 2001). The incentive to ensure timely rectification of operational problems seems similarly to be working, with contract managers reporting that such problems are resolved within the time frame allowed in 82% of cases. Of itself, this evidence does not necessarily prove that it is equity which has led to these generally satisfactory results; theoretically, they could be attributable to the payment mechanisms under the operating contract. However, the evidence reported in SLTP does at least suggest that equity is having a beneficial effect on long term performance management. The longer the satisfactory figures hold up, the stronger this inference will become.

•  How has equity reacted when problems have emerged in projects? The few major problems that have occurred have often swamped equity, resulting either in termination or requiring a financial contribution from the public sector towards the resolution of the problem (e.g. a financial contribution towards modifying an asset to improve its performance). However, the experience of Jarvis, where equity injected significant additional funds to help the completion of projects which were in mid-construction when Jarvis's problems emerged, is a clear example where equity has put its hand in its pocket (see Case Study 4, page 13).

•  Where projects have been terminated through contractor default, equity has certainly taken pain. A well known example is the National Physical Laboratory (see Case Study 3, page 12). In some cases such as these, equity holders have also taken losses in their roles as contractor on a project. A clear example of this is Sir Robert McAlpine's losses during construction on the Dudley Group of Hospitals PFI (See Case Study 5, page 14).