A NEW
PARTNERSHIP
Local, regional and national governments are being called on to carry a heavier social, environmental, and economic development burden at a time when public sector budgets and fiscal capacity are strained. The need for private investment and finance has never been greater and a substitute for the now defunct PFI model is urgently required.
The Tenorez partnership framework is designed to allow governments to efficiently mobilise private capital and investment, all the while addressing key failings of the now defunct PFI model. This includes limiting taxpayers' overall exposure to risk from providing financial support to private enterprises and ensuring that the risks taxpayers do assume can be effectively managed by governments using their fiscal, monetary, legal and regulatory tools.
WHAT WAS PFI ?
The Private Finance Initiative or PFI was a generalised framework that allowed taxpayers to pass responsibility for building and operating capital assets that delivered a wide array of public services—from infrastructure to prisons—to the private sector. Many of these services were deemed to be socially and economically critical. Assets were returned to the public at minimal cost to the taxpayer, usually after a period of 10-30 years. PFI's main aims were to expand availability of services to consumers, improve service quality, and lower costs, all without recourse to taxpayer funds.
WHAT BROKE ?
Over time, PFI was assessed to deliver inadequate value for money to taxpayers. Service costs to consumers often increased, due in large part to higher costs associated with private finance, and service quality did not always improve or meet taxpayer expectations.
Given the social and economic criticality of services transferred to the private sector under PFI, many schemes ended up being full recourse to taxpayers. When a PFI enterprise failed financially—an all-too-common occurrence—taxpayers often had little choice but to intervene with a financial lifeline. The social and economic costs of service disruption from a bankruptcy were often deemed too high to not do so. Many in policy circles came to view PFI enterprises as privatising profits and socialising losses.
WHAT'S OUR FIX ?
The Tenorez partnership framework is designed to address key PFI failings.
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It allows for the cost of services delivered by the private sector to reflect social and economic needs and affordability.​
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This supports service demand and addresses a key political sensitivity in relation to PFI.​
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It is achieved by very significantly lowering capital recovery costs to partnership enterprises by inserting a sizeable concessional loan into its capital stack. These loans can meet up to 3/4 of total investment needs and be priced inside the relevant government's cost of borrowing. Lower capital recovery costs can be passed on to end-consumers in the form of lower prices, improving affordability, or introduce incentives for enterprises to improve service or output quality. ​
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It can substantially reduce the risk of taxpayer bailout by reducing the likelihood of bankruptcy and foreclosure that can lead to service disruption.
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The partnership framework achieves this by allowing enterprises the right, exercisable in case of a demonstrable need, to defer interest and principal payments, to subordinate the concessional loan, facilitating private credit market access and financial liquidity, and in extremis, extend the concessional loan's final maturity.
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Should an enterprise exercise these rights, concessional loan providers are protected. The partnership framework embeds a new type of structured explicit sovereign support mechanism that allows concessional loan providers to substantially earn their required return and recover their capital, even if the concessional loan is never repaid.
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