Internationalising PFI

The Private Finance Initiative was invented in Britain and now generates about £4.5bn of capital expenditure in public services each year in England alone. After a slow start, other countries are getting in on the act. Paul Gosling looks at what is happening and where

Japan, Canada and Australia - not to mention potentially all of the enlarged European Union - have one significant feature in common. They are all ripe for a rapid expansion in the use of PFI. As the experience in Britain has shown, the economic conditions conducive for PFI use are a public sector infrastructure in need of modernisation, a reluctance to increase taxes to pay for it by conventional means and a political environment in which governments want to keep a brake on public sector borrowing. In short - the situation in which just about every country in the world now finds itself.

Not that it is new for countries outside the UK to use PFI. South Africa, the Netherlands, Portugal and others began using PFI in the mid-1990s, especially for transport projects but also, in the case of South Africa, to build new prisons. The difference today is not just that PFI is rolling out to more countries, but also to finance more activities.

PricewaterhouseCoopers reports, for instance, that while Portugal has used PFI for road building for some years, it is now adopting it for hospitals too. Norway is using PFI for roads and Denmark to build bridges. In Canada, the state of Vancouver uses PFI for road and rail. And Japan, the Australian states and the Irish Government are adopting the PFI approach for a wide range of infrastructure projects, including transport, health and education.

France, as ever, is a special case. Its industrial ownership structure and the relationships between businesses and government remain different from other European countries - with more companies still state-owned and French politicians apparently keen to retain an influence over privatised businesses. France is now taking up PFI, but possibly for the distinctive reason that it enables private finance to be brought in without necessarily going for full privatisation.

�France is a conundrum,� says Charles Lloyd, head of PwC�s PFI business. �It has only recently begun to be enthusiastic about what we call PFI. France is now high on the list of those coming to the UK to look at British schemes.�

Europe�s largest economy is also moving down the PFI road. �Germany has been stop and start,� reports Lloyd. �It is enthusiastic at some lander (regional state) levels, but not others.� He adds that the federal German Government is intending to create a public sector task force to boost the use of PFI.

It seems as if - Japan excepted - PFI remains largely confined to the European Union, EU candidate countries and nations operating the �Anglo-Saxon� economic model. The one glaring omission that might be expected to take on PFI more widely is the United States. �The States is tantalising,� says Lloyd. �We have a senior person over there because we think it�s an interesting market, but it�s not taken off.�

Eastern Europe is beginning to embrace PFI more wholeheartedly, but, says Lloyd, the focus until now has been on EU funded public infrastructure rebuilding and the privatisation of key industries. With a new phase about to begin, including many of the nations joining the EU next year, much future funding from Europe will require matched contributions from states which may only be available from private finance.

Indeed, the European Commission is enthusiastic about PFI and other forms of Public/Private Partnerships (PPPs). It is currently evaluating how existing procurement rules can be amended to assist, not hinder, PPPs, with a comprehensive policy framework to be published by the Commission next year.

But the Commission could have strong concerns if it thinks member states are taking up PFI just to take government debt off-balance sheets. There are already worries by some accountants and economists at the extent to which the UK uses PFI as off-balance sheet financing. The UK�s Treasury points out that 60% of PFI schemes are on-balance sheet - inferring that approaching £2bn of annual infrastructure spending is off-balance sheet and, therefore, not counted in the public debt figure. This could be very helpful if the UK seeks in the future to join the euro.

And some of the nations most interested in further use of PFI - France, Germany, Italy and Portugal - are those facing the biggest difficulty in meeting the 3% budget deficit limits under the eurozone�s stability and growth pact. �The EU will be keen that it is not just to get round the stability pact,� says Jeff Thornton, head of PFI at the Royal Bank of Scotland.

RBS is, like PwC, benefiting from the strong PFI growth. �This year we have recruited teams into Madrid, Milan and Paris,� explains Thornton. �We have also beefed up our team in Australia.� RBS reports a more positive response in America than PwC has found. �We are well positioned in the US, where there is strong interest in Texas and New York and from some other state governments,� Thornton says.

PFI development in each country can reflect its national culture. The Baltic States are heavily influenced by Scandinavia, while Japan has its own model for projects including hospitals and airports which is closer to outright privatisation. �I really don�t see western banks breaking into the Japanese market,� explains Thornton.

Not that culture is the primary factor holding back further PFI expansion. Countries need a level of market maturity for PFI to be appropriate, a legal framework which protects PFI investors and a level of political stability to provide certainty for investors that they will achieve a good return. Countries below a certain size may also need well financed local banks to invest in schemes too small to interest major international players - as has been the case in Israel. These factors help to explain why PFI is not embedded in India, Africa or China, despite the latter�s privatisation programme.

And while there is massive capital investment going into Iraq and a big privatisation programme, the prospects for using PFI there to rebuild infrastructure are regarded as slim because of the high risk environment. Paul Haley, director of the secretariat of the International Project Finance Association - which promotes worldwide use of PFI - says: �No investors will want to go to Iraq for the moment.�

Andy Wynne, head of public sector technical issues at ACCA, believes there are other reasons for caution at the exporting of what remains a contentious means of attracting private finance and skills. PFI practice is still evolving in the UK and recent advice from the Treasury recognised that PFI is unsuitable for IT projects, where there have been a number of failed schemes. Staff are often unhappy with PFI and a survey of ACCA members showed a high degree of scepticism amongst public sector accountants about the reasons for adopting PFI, while doubting how beneficial implemented schemes have been.

Wynne argues: �I think that the UK Government and other UK based bodies should question the appropriateness of recommending PFI when its practice in this country is subject to so much debate and continued reform.�

Paul Gosling is contributing news editor of accounting & business and is a specialist public sector journalist.