Charles Hardeman, an Associate Consultant of GDP Global, is also CEO of Santerre Ltd. (….But, It Is Not All Bad News 
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Not only has the global financial crisis slowed the development of most PFI projects in the U.K. (‘Public Private Finance Initiatives’ 
for developing infrastructure), the funding models have changed dramatically. In one extreme, the ‘Building Schools for the Future’ (BSF) programs have abandoned private sector finance all together, with the Government now favoring design and build contracts because they believe that this will get money in to the system faster.
For those PFI Projects that are proceeding, the funding has taken on a new dimension, as the following table demonstrates:
PFI Funding Pre Crisis
Bidders competitively selected funders and attracted finance fairly quickly.
* The Equity IRR was 12-15%
* Funding Costs:
-Reasonable margins on Senior Debt : LIBOR +50 to 120bps (basis points) / margins lower during operations.
-Arrangement Fees: 50 – 100bps
-Insurance FEE : 10 – 20 bps
-Commitment Fees: 25 – 50bps on Undrawn Debt.
-Agency Fee: £10 – £35 annually for Bank to monitor Special Purpose Vehicle (SPV) funding costs.
-Subordinated Debt Coupon: 10-12%
* Equity Bridge Funding during construction.
* Gearing Ratio- Debt to Equity: 90:10
PFI Funding in the Crunch
Funding is scarce. Lead Arranger doing deals to syndicate the debt, but funds are not available; however, some banks are ‘clubbing’ together to fund projects, with difficult terms.
* Only about 12 funders in the PFI arena.
* Margins have increased significantly on Senior Debt: 150-200bps (some up to 300pbs!).
* Other fees have increased significantly: arrangement, commitment and agency fees.
* Banking terms held only for 3-months.
* Re-financing post financial close more prevalent (with new 2008 Treasury rules on public / private split – 70 : 30).
* Interest Rates have fallen helping to offset some of the increased financing costs.
* Deals are taking longer to close, with greater Credit Committee scrutiny of terms, contractor credibility, etc.
Optimism for a quick return to the ‘good old days’ in PFI for the U.K. is in short supply. However, Babcock & Brown Public Partnerships (BBPP), which floated on the FTSE 3 years ago, has demonstrated the upside potential in the PFI sector. The management company was recently bought by their existing staff after their parent company, the Sydney listed Babcock & Brown, was placed into voluntary administration because of its crushing debt. BBPP has about 50 PFI projects, mostly in the U.K., and their numbers are very good: Net Assets up 4.6% on the year, pre tax profits up 8%, £75 million in cash and facilities and a balance sheet showing gearing of only 13%.
