3.10 Under the PF2 model, the government will take a minority equity stake in all deals - typically 10% of the equity. This should improve transparency, as the public sector will have a seat on the board. The IPA will manage this investment. This will require careful management as the public sector will be both an investor and a customer. In the past, some PFI school projects included a public sector equity stake; however, it is now required for all new deals. The government chose to sell its stake in these PFI school projects to raise funds, and the IPA told us there is no guarantee that PF2 equity stakes would not be sold in the future.
3.11 The equity stake allows the government to share in project risk and returns. However it is unclear why the public sector is willing to take on the risk of equity (which is most exposed to project performance) rather than the lower risk of debt. If there are any problems, equity holders will suffer before debt holders are affected. If the government is confident that it will receive a return from its equity investment this would imply that it believes the debt holders (who receive a premium on government gilts) have a very low-risk investment. The low-risk nature of the debt investment in PFI was noted in some of the responses HM Treasury received in the call for evidence for reform of PFI and is also reflected in the performance of PFI debt: we are not aware of any operational PFI deals where the debt holders have suffered loss once the asset is constructed and operating. In some countries such as France and Germany, the public sector often guarantees PPP project debt and cash flows post-construction.60 This can lead to a significant reduction in the overall cost of finance, and therefore savings for the taxpayer, but the public sector is exposed to a lower risk compared to holding equity during the construction phase. IPA told us that the public sector equity stake was not designed to reduce costs but was for the purposes of increased transparency.
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60 In France a mechanism called cession Dailly can be used to effectively guarantee up to 80% of project cash flows after construction. In Germany the Forfaitierung mit Einredeverzicht can be used to guarantee some or all of the debt after construction.