A significant percentage of signed deals under the private finance initiative (PFI) have involved property in one way or another.
PFI projects that involve property provision as a core part of the service are not all identical. Property PFI can involve a wide range of types of transactions – from single site accommodation projects (such as the HM Treasury project), through to estates deals (such as DSS PRIME), to projects that involve the acquisition of land by the bidder as a means for it to deliver the relevant service (such as the Inner London Barracks project).
Property PFI differs from other financing structures secured on property. Two points show the way forward to developing the property PFI market: such projects have already produced savings, as the National Audit Office (NAO) report on DSS PRIME shows; and the introduction of resource accounting and capital charging will give property PFI a greater impetus.
How is PFI different?
Property finance is nothing new. Because of this, the PFI in the context of property projects has been compared to traditional property concepts. Some say it is essentially a mortgage. Others use a lease analogy.
However, it is important to understand that PFI is fundamentally different from both leases and mortgages. A PFI property project will invariably involve a property mortgage, but the commercial reality of payments under a PFI contract is very different from a traditional secured financing. With a PFI project, the
recipient of the property service pays according to performance, whereas nobody can scale down their mortgage payments to the extent that their property is not heated, serviced or
otherwise maintained.
Again, a PFI contract is very different from a lease. Under a typical lease, the tenant will take the risk of all service, operating and maintenance obligations which are incurred during its occupation. Effectively, this will often mean that the person who takes the cost risk in connection with a building has no control over the original design or cost escalation (particularly in the context of design build solutions). In addition, the tenant must, of course, be responsible for any finance charges incurred in connection with the acquisition of the property interest. PFI, on the other hand, encourages an early focus on design problems and solutions by focusing both the occupier and its financiers on the risks inherent in property occupation.
In many ways property PFI has a readier analogy with the hotel sector: a range of services is provided, and failure to provide any one of them can lead to a price reduction. It is up to the hotelier to manage the costs of operation and finance, and if a miscalculation occurs the result is a loss.
The positive results delivered by property projects undertaken through PFI are already influencing the wider property sector, and discussions are taking place in the private sector for PFI-type solutions to traditional property problems.
