As mentioned previously, the PPP model has been used extensively in the UK and is not without public criticism from many corners. In 2012 the government started to try and reform the PPP model, changing the previous PFI model into “PF2”, to address some of the perceived problems.
In reality, the vast majority of the contract structure was to remain the same, but certain areas were subject to reform as shown in the table below.
Since PF2 was introduced, however, the level of public procurement has dropped significantly through the PPP route with very few new projects having been initiated through this model.
Most recently, on 29 October 2018, the Conservative government announced that it would scrap centrally-funded PFI/PF2 as a means of procuring projects going forward, although there would always be a place for some form of PPP projects (the implication being those which do not require central government grant funding). Since most people consider that private finance is essential for the government to continue to deliver its infrastructure requirements, time will tell what approach the UK government adopts moving forward.

(a)        PPP reform in Scotland and Wales

In two devolved administrations within the UK, use is being made of a different reform called the “Non-Profit Distributing” or “NPD” model, although it could be used anywhere in the UK. It is an alternative funding structure for PPP projects that would previously have been carried out under the PFI.

The NPD model resolves various perceived problems associated with PFI. The key difference is that the concessionaire’s shareholders are entitled to recover a fixed return on their investment – effectively a margin on their subordinated debt – but if a greater profit is made than this agreed rate (for example, due to reduced market costs) the concessionaire does not keep the excess but must return it to the government. This addresses the “windfall” profit concern.

(b)        PPP reform in Latin America

In Latin America, the PPP model has been subject to different drivers and issues, some of which are depicted in the diagram below, prepared by the Argentinian Ministry of Finance in 2018 to outline their approach their new PPP roads programme.

For example, the risks of currency devaluation, government covenant and construction completion risk have all been addressed in the new Argentinian PPP programme by the following approach:

(i)         When individual works milestones are completed (e.g. each 10km of road), the concessionaire is awarded a “payment title”, which is fully transferable and entitles the bearer to a series of fixed payments in US dollars over a 10 year period.

(ii)        These payments are to be guaranteed by a ring-fenced PPP trust fund, which has the benefit of certain funding guarantees from central government, which can be enforced by beneficiaries.

(iii)       The beneficiary is entitled to the series of payments regardless of the outcome of the remainder of the project.

This approach allows for different funders to be involved: short-term funders over a smaller amount taking completion risk, and longer-term lenders over a longer amount taking no completion risk but only central government covenant risk, which in turn could be mitigated by political risk insurance or export credit guarantees.

Each of the other risks listed in the diagram were also addressed in an up-front and transparent manner by the Argentinian government, with a view to encouraging more international bidders to participate. In the first round of six PPP roads projects, the Government received over 30 bids from six different consortia, which demonstrated a healthy engagement with the process.