"The key factors are that projects should be of national importance, have a robust and proven business case and are ready to start."
mark williams, pa infrastructure and commercial finance expert
The government is proposing to make guarantees available for projects with a value totalling £40bn and temporary lending for PPP schemes with a value totalling £6bn. A clear understanding of the financial implications of the government’s guarantees and government temporary lending (co-investment) will be important, as they will form part of the approval process.
These measures are designed to support projects of national importance, meaning that they are likely to be in the National Infrastructure Plan, have a robust and proven business case and that are “shovel ready”, where a contract can be let for work on site to commence within a year of the guarantee being granted. The announcement outlines an application process for departments and other public bodies.
The government’s three financial frameworks
We need to start by reminding ourselves of the government’s three financial frameworks in this area. The first is the financial accounts that are now prepared under International Financial Reporting Standards (IFRS) as adopted for use in the public sector. This has resulted in the underlying assets and associated liabilities being recorded on balance sheet for almost all PPP/PFI/ concession projects.
The second is the National Accounts, which are the statistical measures of deficit and debt. For PPP/PFI/concession projects the approach taken across the EU and beyond, under these measures, considers risks and rewards and means that many of these projects remain outside the national debt.
Finally, there is the budgetary control framework, operated by HM Treasury for departments and their agencies.
HM Treasury’s PPP guidance
For PPP/PFI/concessions projects, the budgetary framework follows the National Accounts treatment. This means that where a project remains outside the national debt there is no call on the capital budget of a department upfront. Instead, a call is made on the resource budget across the life of the project, broadly as the cash is paid to the private sector partner. Without the budgetary cover (whether capital or resource) a project cannot progress. This is more of an issue where capital budget cover is required because capital budgets have been squeezed more across the spending review period than resource budgets. Equally, because the whole value of the underlying assets would score against the capital budget in year one, the sums involved are much greater.
The Treasury guidance covering the treatment of these projects under the National Accounts/budgets guidance dates from September 2009. It does include consideration of both government guarantees and temporary lending by government. The inclusion of this material could be seen as anticipating the latest initiatives. However, it is important to note that both guarantees and upfront investment have historically been used in a number of projects, for example transport concession arrangements like High Speed One and prepayments of funds into NHS projects.
Importance of considering the impact in the round
For both guarantees and temporary lending the key message is that the impact of the guarantees and/or lending, and whether the underlying project can remain off the national debt/outside of the capital budgets, needs to be considered in the round. This consideration is of all of the risk, reward and control features in the project, and the result of this consideration is likely to differ for each project, meaning a case-by-case analysis is required. The nature of both the guarantees and the temporary lending/co-investment is important. This means a number of questions need to be asked. Is the funding coming in from government paying for a specific asset class, meaning it would be likely to pull those assets into the capital budget envelope? Is it best characterised as a prepayment of the unitary charge? Does it face the same risk/ reward regime as the private sector like-for like? Or is government the backstop holder of risk, which could mean that its 25 per cent investment gives it 100 per cent of the risk?
The need to clearly understand the financial implications
Understanding these financial implications is important, and will be part of the approvals process, but that does not mean that projects where guarantees and/or temporary lending are employed must all be off national debt or capital budgets. Like the consideration of the financial implications of the guarantees/ temporary lending, we understand that the eligibility of each project for these measures will be on a case-by-case base. The key factors are that projects should be of national importance, have a robust and proven business case and are ready to start, as well as that clear understanding of where the project sits within the various financial frameworks.
Mark Williams is an infrastructure and commercial finance expert at PA Consulting Group