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At the beginning of this month, the UK government changed the rules for profit sharing for the development of infrastructure in partnership with private companies under the Private Finance Initiative (PFI), known elsewhere as public private partnership (PPP).

Almost 800 projects, worth more than £54 billion, have been delivered under the PFI, which previously provided for a 50 – 50 split on refinancing of the project. Now, however, private sector investors will receive only 30% of the profits on refinancing while the public sector takes 70%. The revised rules will be applied to 200 proposed projects, worth in excess of £25 billion.

A further change in the rules allows the government to also call for a refinancing; previously, private sector developers and investors controlled the timing of any refinancing.

This is not good news for the programme to create new hospitals, roads, prisons and schools under the PFI. It comes at a time when the government intends to step up spending on infrastructure in partnership with the private sector. Because of the changes however, many investors and private sector infrastructure developers are now reconsidering their participation in PFI schemes; many have decided to pull out of new initiatives altogether.

The rule changes also exacerbate problems in the industry caused by the credit crisis. One project that has run in to financing problems because of paralysis in bank lending is the widening of the M25 London orbital road, a £4.5 billion (US$ 7bn) road improvement programme. New waste facilities in the north of the country have also been blocked due to financing problems.

Your country may also follow suit. So if you are planning PPP initiatives or want to build an economic promotion strategy based on private finance participation, then make sure you are up to speed on the international financial belt tightening!

For more explanation of PFI or PPP read my earlier blog or get in touch with me.