1. Governance Issues in PPPs - Policy Responses to PPPs in the UK Edward Farquharson PPP Days 2010 Manila 22-23 March 2010

2. Agenda Recent policy responses: TIFU Future policy responses: Infrastructure UK

3. Market Capitalisation of UK Banks

4. Short term consequences for PPP projects Recapitalisation of banking system Weak macroeconomic climate Re-thinking of safeguards against risk Sticky pricing ‘Club’ deals rather than ‘Syndication’ Shorter tenor Bond financing remains difficult VfM Timetable Refinancing Affordability Uncertainty

5. Possible short-term funding fixes Increased multilateral lending (EIB) Public sector capital contribution Contractor Loan/Corporate funding Public Authority / Department Loan Debt underpinning by public sector But: Appetite and availability State aid Vires Risk transfer and value for money

6. The Infrastructure Finance Unit (TIFU) £1-2 billion ‘fund’ established in March 2009 –To help projects reach financial close –Arms-length unit within HM Treasury –Credit committee and other governance Loan on commercial market terms –Pricing –Voting rights Access via public sector financial adviser and PFU sign off –Funding not available or –Not available on appropriate terms Greater Manchester Waste deal closed with TIFU loan of £120mm

7. PPP model will survive but alternatives are being explored Liquidity is returning, but recapitalisation will take time Capital markets investors are looking for a way back into the sector –Unwrapped bonds –Subordinated debt funds –Senior debt funds Pricing is unlikely to revert to 2007 levels and some projects may become unaffordable without innovative solutions What does this mean in the longer term?

8. UK Infrastructure Challenge £500bn over the next 10 years 50% in energy markets 30% Public Sector investment 70% Private Sector investment Regulated markets coming under strain –Low carbon agenda –Social policy

9. Capturing the benefits of PPP Extended risk transfer Whole life cost approach Set aside budgets Output based contracting Management of supply markets

10. Wide Range of Procurement Models

11. Current system challenges 1 Need for longer term vision for national infrastructure requirement Avoid investment occurring in an ad-hoc way. Avoid responsibilities and accountabilities being silo-ed Need for better knowledge of vulnerabilities from interdependencies. Better resilience against systemic failure New challenges: e.g. climate and socio-demographic changes. Investment capital and supply chains are limited and competed for globally. 1 Council for Science and Technology report June 2009

12. IUK - Rationale Establish a body with a clear responsibility for developing and supporting delivery of an infrastructure strategy for the UK. Bring together TIFU, HMT’s PPP policy team, the IUK set up team and PUK’s core project/programme delivery capability. Provide a focal point for infrastructure investors and industry, able to tackle cross-cutting policy issues. Help ensure value for money for Government investment in a fiscally constrained environment. Achieve efficiencies by reducing interfaces whilst retaining professional delivery capability and deploying it more effectively. Continue to address the commercial skills gap in Government.

13. PRIVATE REGULATED CENTRAL PUBLIC SECTOR LOCAL PUBLIC SECTOR INFRASTRUCTURE SERVICESFUNDINGASSURANCE PUK INFRASTRUCTURE UK HMT PUK LOCAL PARTNERSHIPS OGC TIFU UKFISHEx LOCAL PARTNERSHIPS SHAREHOLDINGS Current Institutional Structure

14. PRIVATE REGULATED CENTRAL PUBLIC SECTOR LOCAL PUBLIC SECTOR SHAREHOLDINGSINFRASTRUCTURE SERVICESFUNDINGASSURANCE UKFI INFRASTRUCTURE UK LOCAL PARTNERSHIPS OGC SHEx LOCAL PARTNERSHIPS Future Institutional Structure

15. Structure and leadership Part of Treasury but with a separate identity and presence in the market. Chaired by Paul Skinner (Chairman, Rio Tinto, 2003-2009) and led by James Stewart. Supported by an Advisory Council comprising independent experts and Permanent Secretaries from relevant Departments. Reporting to Lord Davies and Treasury Ministers.

16. Core activities Strategy: plan, develop and implement a strategy for UK infrastructure. Finance: assess options to attract additional capital to finance UK infrastructure; assume TIFU’s PFI funding role. Policy: lead on PFI/PPP and broader infrastructure delivery policy. Prioritisation: advise Treasury teams and Ministers on spending priorities. Scrutiny: support Treasury approval processes. Market leadership: Government’s focal point for infrastructure investors, developers and operators. Support to departments on delivery of major projects/programmes.

17. www.partnershipsuk.org.uk edward.farquharson@partnershipsuk. org.uk +44 (0) 207 273 8040