In 1992 the UK Government introduced legislation that gave birth to the "Private Finance Initiative" (PFI) in 1992. In 1997, the new UK Labour Government amended procurement rules and introduced public private partnerships (PPPs) which included the introduction of complete or partial privatisation of assets, contracting projects out as PFI and selling government services in collaboration with private sector companies (Spackman, 2002). The systematic development of PFI in UK as set out by Spackman (2002) is shown in Table B.2.
Table B.2: History of PPP in UK31
Timeline | Major events |
1989 | UK Government begins to actively promote private finance in public services. |
1990 | First PPP style project reaches financial close |
1992 | Private finance initiative (PFI) launched. First and only toll- road concession reaches financial close. |
1993 | Private Finance Panel established |
1995 | List of priority projects produced, and procurement begins |
1997 | New Government elected, continues and increases PFI |
2009 | HM Treasury establishes an infrastructure Finance Unit (TIFU) to support PFI's impacted by the credit crisis |
2010 | New government elected: continues to manage existing pipeline |
2012 | Details of PF2 published and first project announced |
2018 | PFI model 'cancelled' by UK Government for new projects |
After the 2007-08 Global Financial Crisis, the government reduced its use of PFI and in 2011 HM Treasury consulted on reform. Following a review of PFI, the government published details of a new approach in 2012. It made some changes and re-launched the model as PF2 a year later. In the PFI or PF2 model, usually a private finance company - a Special Purpose Vehicle (SPV) - is set up and borrows to construct new assets such as schools, hospitals or roads. The taxpayer then makes payments to the SPV over the contract term (typically 25 to 30 years) which covers equity and debt repayments, financing costs, maintenance and any other services provided.
The PF2 was officially launched, following a critical report of the Public Accounts Committee (PAC). Although it is similar to the PFI in terms of its financial structure and contract, there are five key differences between the PFI and PF2:
• equity structure and credit enhancement - debt to equity ratio from 90:10 to 75:25 or 80:20 with public sector injecting a small percentage of equity
• acceleration of delivery - a "cookie cutter" approach to planning and designing facilities
• service provision - removal of soft services, for example, cleaning or gardening
• more appropriate risk transfer - (changes in laws, site contamination by offsite sources, utilities consumptions risk, and
• greater transparency (including public disclosure of project data and document).
The first PF2 project was announced in 2012, a £160 million project involving construction and maintenance of 12 schools in North-East England. Since then, however, only six PF2 projects have reached financial close, including the Priority School Building Programme and the Midland Metropolitan Hospital, with capital values of £623 million and £297 million, respectively. Several other projects originally designated for PF2 financing did not begin.