Q1 – It has been nearly four years since publication of the first edition. What would you say have been the major changes in public-private partnerships (PPP) since then?
A1 – As we went to press with the first edition, PPP remained very much in full swing and the move towards standardisation of documentation, in the United Kingdom at least, was very much in the ascendancy. That insistence on adherence to precedent undoubtedly was saving costs in many deals and creating a model that could be and was exported to other jurisdictions eager to take a shortcut in getting to acceptable risk positions. Across Europe, the PPP model was developing and deepening. There were some signs of resistance to its advance, but social investment programmes looking for a high volume of transactions which promised rapid change remained hugely attracted to PPP. That all came to a grinding halt with the onset of the credit crunch. Some programmes have survived – perhaps those that have done best are where there is a central government push for something implemented at a local level. We have seen a small number of big-ticket deals done, almost through the obstinate determination of the parties to finish what they had started. For a while, PPP was the 'new tool' in a government's procurement armoury; then briefly it was 'the tool'; and now it has become 'one of the tools'. This is a reflection of a maturing concept and probably the most healthy position for all concerned.
Q2 – What do you think the effect of the general election will be on PPP in the United Kingdom?
A2 –Everyone seems to agree that investment in infrastructure will be one of the ways that any government will seek to stimulate the UK economy out of recession. So it seems it will be just a question of which sectors get the attention and how quickly the various programmes can be restarted. Things will take longer now that there has been no clear winner, as the focus will remain elsewhere. A change of administration may see a further delay in activity returning if there is perceived to be a need first to redesign or re brand the procuring process that we now call PPP and previously called Private Finance Initiative (PFI). No doubt some new acronym will become part of our daily lives, but whether it will be fundamentally different from its predecessors remains to be seen.
Q3 – With the recent credit crisis and economic downturn, what has been the effect on financing of PPP?
A3 – Well, it certainly got a lot more difficult. No more project bonds - at least not for a while yet and not on the scale seen before. One can quickly forget how much the project bond economics seemingly dominated the market, for big-ticket projects at least. Anyone who can find a way to structure an unwrapped bond so it achieves an investment grade is going to have a lot of very happy market participants queuing up to give their thanks. Some deals have happened, of course, and one senses that those banks with access to funds and a broad lending remit have remained very active as they have had much less competition to worry about than previously was the case. They have had to keep pretty mobile, though, picking off the deals all across Europe and in North America too. Smaller deals are taking much longer. Those previously underwritten by one or two banks and syndicated post-close now require a club approach – more banks before financial close means more moving parts and a slower process. That’s not to blame the banks – it’s a just a fact of life at the moment.
Q4 – The United Kingdom, along with other jurisdictions, is particularly worried about public debt. What effect do you think this will have on PPP?
A4 – When PPPs were first introduced as PFIs in the United Kingdom, the suspicion voiced was that this new method of procurement was driven by an obsession with off-balance sheet treatment. As time progressed, this appeared to be less important and it is difficult to see how we can now row back from a position which recognises these projects as part of the national debt. If I were being flippant, I might say that the level of public debt is now so high that what is the problem with a few billion more? There is some truth in that old saw that if I owe the bank £100 that I can't repay, then I have a problem; but if I owe £1 million that I can't repay, then it’s the bank that has the problem. But if it is true that UK infrastructure spend needs to run at around £50 billion a year for the foreseeable future, there must be an issue. I am not a banker or an economist (that much must be clear from my comments), but I suppose there may be a distinction between debt that you worry about because it is falling due for repayment tomorrow and debt that you worry less about. The kind of public debt that PPP gives rise to does not tend to have a large balloon repayment profile, but rather a predetermined long-term cost of servicing. If investment in infrastructure really is to be one of the routes out of the recession, we may simply have no choice but to ensure - so far as possible - that we are completely convinced on value for money and risk transfer issues.
Q5 – Maybe it's a bit early to say, but what do you think you will be including in the next edition? Where do you see the industry headed?
A5 – It is easy to focus too much on the United Kingdom and continental Europe, where PPP has touched almost every part of public services and infrastructure procurement that there are few obvious new areas of application. Many countries in the world are just beginning to develop their relationship with public-private arrangements of this sort. Maybe we will need a chapter on how PPP in the Middle East has transformed public services or how PPP structures applied in India to the roads and rail sectors have opened up that country to allow greater access to its many ports, all now developed through PPPs. We shall have to see.
Across Central and Eastern Europe, there is understood to be a need to find ways to meet the new North Atlantic Treaty Organisation (NATO) related defence obligations. Procuring defence projects in the United Kingdom has always been seen as a somewhat tortuous process and it will be interesting to see whether that is an inherent feature of defence generally or whether it is just special to the United Kingdom. A chapter on NATO-inspired PPP, perhaps?
Looking to the United Kingdom, if there was a difference between PPP and its predecessor PFI, then perhaps at its heart was the de-emphasis on finance and the consequential greater application to projects that are more service orientated than capital intensive. If that trend continues, then perhaps we will see chapters focusing on new projects in the social services sector – say, meals on wheels or health visiting, or possibly domestic kerb-side waste collection. If the availability of capital remains constrained, then perhaps the mantra will be to 'think small, think local'.
At the other end of the scale sits nuclear power. No one will regard this as not capital intensive and it's bound to be hugely controversial. But PPP has never been afraid to court controversy so, who knows – perhaps nuclear PPP will be one of the new growth areas.