Dr. Mark Hellowell University of Edinburgh

Transcription

1 Dr. Mark Hellowell University of Edinburgh

2 The private finance initiative: 717 signed since 92; 631 operational = 10bn annual unitary fees In procurement: 39 projects with capital value 5.4bn - but little progress (and politically costly) Review: government launched PFI consultation, concluding December Private Finance 2 PF2 addresses the fundamental concerns of Parliament, public sector and taxpayers (HMT)

3 -2007: active bond market (with AAA-rated wrap from monolines) competed with banks 2007-: no bond market (exit investors in AAAdebt); cuts to lending, increase margin Basel III: banks set aside more capital against risk-weighted assets = long-term loans costly

4 350 Credit margin (basis points) Source: HMT 2012 > 300bp + ratchets (mini-perms) to incentivise (require) refinancing. Significant risks and high fees Relation to credit quality? Negligible default risk; and recovery rate close to 100% (Moody s 2012) Can a govt. with >3% cost of long-term funds (with near-zero t-costs) justify borrowing in this market?

5 The price of finance is significantly higher with a PFI. We have not seen evidence to suggest that the higher cost of finance has been offset by savings attributable to increased risk transfer. On the contrary there is evidence of the opposite The incentive for government departments to use PFI to leverage up their budgets, and for the Treasury to use PFI to conceal debt, has resulted in neglecting the long term value for money implications. We do not believe that PFI can be relied upon to provide good value for money without substantial reform.

6 Banks to be sidelined in favour of institutional investors pension funds, life-insurance firms Solvency II? Long-term loans associated with high capital requirements. A- rating needed Consequently, under PF2 1. Bidders will adopt less debt-heavy structures (gearing) 2. Competitions for equity (and a public sector stake) 3. Less risk-transfer (utilities, insurance) and risk-sharing 4. Possibility of credit guarantees but not core to model

7 Keeping current rates constant, lower gearing increases Weighted Average Cost of Capital by 12% Possible moderating influences? 1. Equity competitions? Historical performance of equity returns strong, but 15% norm very stable 2. Public equity (25-49%): reduces overall cost of capital, but cost of private element is still higher 3. Cost of debt: Solvency II and pipeline issues key 6% gap in public vs private capital likely to remain

8 Accounting on (but only game in town ) Nat. statistics off (finessing debt/ deficit) Budgets off (additionality preserved) control total cap on % of expected future revenues allocated to a project/ programme Incentives remain to pursue PFI/PF2, but a harder budget constraint is welcome (see SR)

9 PF2 perhaps the most comprehensive attempt so far to regenerate the PF market in the post-crisis environment Success depends on the market s response: if appetite is limited, PF2 will fail to address issues of cost & availability Move from PFI to PF2 may increase WACC, and is likely to be higher relative to risk borne - at least in the short term Strong incentives to pursue PF2, but the economic and political sustainability of the model has yet to be secured