Public private partnership financiers' perceptions of risks

This study focuses mainly on the financiers in the network of organisations that are involved with the delivery of projects under the private finance initiative (PFI) in the UK. The study examines the financiers’ perceptions of the risks involved in the investment of equity and senior debt in PFI projects.The research strategy is three-fold. Firstly, a literature review identified key themes, from which a questionnaire survey was designed. Secondly, a database of financiers was created and the survey was administered to 109 providers of equity, senior debt and bond finance, from which 43 usable responses were received, and follow-up interviews were carried out with eight respondents. Thirdly, six PFI projects were selected as mini case studies to examine perceptions of risks in the public sector. Semi-structured interviews were conducted in five sectors - roads, hospitals, schools, prisons and social housing - since risks may differ between sectors. The research posed four questions: how do financiers perceive the risks associated with PPP projects? How do financiers manage the risks associated with PPP projects?How have changes in the industry affected financiers’ perceptions of risks? How do the financiers’ perceptions of risks differ from those of their public sector partners?The findings show that a complex network of organisations surrounds the two main partners to a PFI contract – the procurer and the SPV. Within this network, risk passes from the SPV by means of legal contracts to subcontractors, who are responsible for construction and operations. Risks may be allocated to parties who cannot control them or do not wish to hold them, in which case they will be mitigated by various means, including hedges and swaps and frequently insurance. Such risks are thus dispersed around the private sector, beyond the immediate PFI network, and add cost to the project. Senior debt holders and bond holders have a powerful position within this network. Contracts may be changed to accommodate the requirements of their financial models and the formality of the legal contract may reduce flexibility in practice or may cause delay. Subcontractors must provide financial and performance supports essentially to protect the interests of the financiers against poor subcontractor performance or contractor failure. Crucially from a credit ratings perspective, debt servicing costs are covered by these supports during any time over-runs on the target completion dates for a project. This research report contributes to an understanding of how PFI operates in practice. It shows that while the private sector is often described in relation to PFI as if it were a single entity, in practice, risks transferred from the public sector are dispersed amongst multiple organisations both within an immediate PFI network and beyond. This dispersion of risks adds cost, raising questions about value for money for the procurer.