PPPs in recession: PPP Bulletin

Posted on April 26, 2009 · Posted in PPP Bulletin

 

It would be easy to conclude that the PPP sector is in crisis – too easy. Despite the collapse in PFI lending because of the global crisis, parts of the PPP market are thriving.

 

In fact, the crisis creates conditions where there could be a significant expansion in the use of PPPs by governments. With tax revenues set to fall for several years, public bodies need to drive greater efficiencies. And PPPs that can deliver these efficiencies will be in real demand.

 

In addition, the economic stimulus packages put forward by Barack Obama and Gordon Brown – likely to be copied across much of the world – include building new infrastructure. PPPs will be a preferred delivery mechanism.

 

But however much demand there is for a product or service, it needs financial backing to translate into orders. And many of the banks that have been at the forefront of lending on PFI and PPPs are now in a dire situation, giving them little scope to lend.

 

RBS, HBOS and Dexia were all leading lenders for PFI and PPPs, with each now subject to state rescue. HBOS is now part of Lloyds. Dexia has effectively withdrawn from the market. And while RBS is still lending on PFI, it is constrained in doing so. Even HSBC, one of the least affected banks, is now reluctant to lend for terms as long as the 25 or 30 years usually involved with a PFI or PPP contract.

 

“Public services companies are struggling to get credit,” confirms a CBI spokesman. “They are no different from any others. That is exactly why [the Treasury’s] PFI bank was set-up, because the Government wanted PFI deals to carry on.”

 

In the consulting sector, this context is leading to a substantial increase in demand for the services of PPP teams. All the Big Four accountancy firms are laying off staff – 1% of all UK employees in the case of Ernst & Young and 250 voluntary redundancies in the UK with Deloitte. But the situation is a lot more healthy for the PPP specialists. As it becomes more difficult to pull together the range of financiers required and to resolve associated problems, so those who advise on projects have more work to do.

 

Andrew Kaye, a partner in Deloitte’s government and infrastructure team, explains: “We are still very busy at the moment. We have not seen an impact on us yet. We are benefiting from having a diversified portfolio of long-term assignments and a strong order book. The public sector is having to deal with more affordability issues. It requires more innovation and creativity from advisors.

 

“We are seeing an increase in workload, with governments looking at current scheme demand, to help clients and the public sector to work through the credit crunch and the lack of depth in capital markets – so it is more problematic to get deals away. It’s harder work and more complex. Banks are run off their feet. Certain banks are pulling out of the market. Those willing to lend long-term are hugely in demand. They will pick projects on the basis of the quality of sponsor and project. The big constraint in the market is finance.”

 

Those contractors with little exposure to the property market, ready access to finance and low levels of debt are doing well. Some specialist PPP finance houses – particularly Macquarie and Babcock Brown – are badly struggling. But Balfour Beatty, Costain, Serco, Carillion and Vinci have all just reported strong turnover and profits for last year, many helped by contracts won before the recession. Nor does the strong performance simply reflect what happened last year. Serco reports things are going very well this year, too.

 

Serco’s spokesman Marcus DeVille says the key for good financial health in the PPP sector is diversification. “Serco is an international business – a 60% UK business,” he explains. “The strength we have is that our portfolio of businesses operate in a number of markets. So we can be nimble and flexible in moving between markets.”

 

What is more, Serco operates in fields that directly benefit from cost pressures on central and local government, particularly business process outsourcing. An example is with its partnering contract with Glasgow City Council where it is operating a range of back office services, and which it is interested in replicating when comparable contracts come up for tender at Essex County Council and Stoke City Council. Serco also won a joint venture contract with St Thomas’s Foundation Trust to deliver pathology services, which it hopes to copy elsewhere.

 

Serco also says that despite widespread reporting that the PFI funding crisis has hit waste management projects, this has not affected the company. It has recently won contracts at Hammersmith and Fulham and at Milton Keynes, neither of which was structured as a PFI.

 

None of this contradicts, though, the perception that things are very difficult for many PFI and PPP contractors. The flow of big hospitals has almost finished. Some big road projects have either been abandoned (the Thames Gateway bridge) or are very difficult to finance (the M25), with the same true of the big waste management schemes. Regeneration projects involving the construction of new private housing have become almost impossible to progress. But there is also good news – particularly with Building Schools for the Future and LIFT, where the financial demands on individual contracts are smaller and more manageable for lenders.

 

The CBI is confident the demand will continue, despite the recession. “What we expect to see is local authorities and others to outsource more,” says their spokesman. “A legitimate concern we have is that people will be doing this for reasons of cost, rather than value for money. It could move back to something like CCT [compulsory competitive tendering], with the lowest cost service provision. It is the service companies that will possibly do the best from the next couple of years. We believe that the reforms and modernisation [of the public sector] are needed now more than ever.”

 

 

Round-up

 

Deloitte. Increased business, no lay offs.

 

PwC, Ernst & Young and KPMG. All declined to comment, but lay-offs on PPP side unlikely for moment.

 

DLA Piper. No comment on the impact on its practice. Says the PPP market is strong in places, weak in others.

 

Serco. Big increase in work overall and higher profits. Expects to take on extra 10,000 staff internationally in next year (3,000 of which are in Dubai in transport). PPP focus expanding into new international markets. No job losses. Operates on a devolved basis, so PPP teams based within divisions: no flexibility for transfers of specialists between teams.

 

Amey. No job losses.

 

Balfour Beatty. PPP investment side “is doing well”.

 

Siemens. “Our health care side is healthy – it is long-term infrastructure.”

 

HBOS. PPP financing team is in the process of being integrated into Lloyds’ corporate finance division. No decision yet taken on jobs. Both Lloyds and HBOS “remain active players” in PPP financing.

 

Land Securities. Sold its Trillium division handling large number of PPP contracts, which has since sold its PPP division to Semperian – an investment vehicle established in 2007 by Trillium.

 

Atkins. Profits on its asset management division will be damaged by PFI maintenance costs. Staff being cut by 5% across group.

 

Costain, Wates, Kier Group, Vinci, Allen & Overy and Balfour Beatty all declined to comment, or were unavailable.