Jason Nissé: They say PPP has hit the buffers. But £20bn says they're way off course

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The Independent Online

I don't usually quote others in this column. But I can do no better than repeat the words of David Metter, chairman of finance house Innisfree. His firm is one of the largest investors in what the Government calls public-private partnerships (PPP) or the Private Finance Initiative (PFI), depending on who's spinning. Last week a bunch of investors in Railtrack wrote an open letter saying the Government had lost its credibility in the financial markets after the Railtrack debacle and that investors would shun Government deals. Mr Metter's response: "I don't really believe that Railtrack has had any impact, but it has been useful for some people to say it has."

Since Railtrack was clumsily forced into administration by Stephen Byers, 19 PPP deals have been finalised. A further 60, including the huge £14bn deal to sort out London Underground and two other big transport schemes, are at "preferred bidder" status: the bids are in, the winner has been selected, and the final details are being sorted out. Leading bankers and advisers, such as Barclays Capital and PricewaterhouseCoopers, say there has been no change in the price changed for finance in PPP deals. Hardly a buyers' strike.

What the "people" who find it "useful" to say the Government has lost its credibility ignore is that Railtrack was a private company. It may have been sold by the Government, may be regulated by a Government officer, may depend on the Government for a large proportion of its income, but it was a quoted plc. If quoted plcs do not do their job properly, they go bust and equity investors lose money.

The way Railtrack was forced into administration was ham-fisted. Mr Byers took the view that banks and bondholders should be protected and equity investors could go to hell. Tactically this was an error. Strategically, though, it was wise.

As the Treasury (which after all pulled the strings in the Railtrack collapse) knew, you need debt investors for PPP deals. The equity mostly comes from the companies taking on the project. And the Treasury needs to keep the bond investors happy, or it would either have to put up the money itself or guarantee the debts. This would mean the deals would appear on the Treasury's balance sheet.

You can view PPPs as off-balance sheet financing of government projects. This is not necessarily a bad thing. There is a big difference between the Rolls- Royce school of joint ventures – where there is a business reason for the off-balance sheet vehicle and the removal of debt from the books is a happy byproduct – and the Enron model, where sautéing the books is the primary purpose.

PPPs not only massage the Treasury's figures but, correctly constructed, transfer risk to the private sector and ensure jobs are done on time and without extra cost to the taxpayer. Since Labour came to power, nearly 500 PPP deals have been struck, investing over £20bn. The technique is being exported – look at how the Dutch are financing their high-speed rail link.

This is the way the Government does business. Private sector firms can either bitch about Railtrack and walk away, or bitch about Railtrack and still bid for deals. Most would choose the latter.

Leeds hamstrung by debt

If Leeds United were a ball-bearing maker, I'm not sure it would be in business. Who would tolerate a management investing huge amounts they cannot afford in the hope of securing bigger incomes, and when they fail, selling off the family silver to balance the books?

Under Peter Ridsdale, Leeds has spent some £100m acquiring footballers. Its debt is £77m and it lost nearly £14m in the six months to December. And it is now planning to sell four star players to bring the debt down to more manageable levels.

More manageable means under £60m – the amount Leeds raised in a bond issue backed by Lazards. But unless Leeds gets its costs under control, I can't see how it can afford to service this debt.

The club now challenges its arch rival Chelsea for the title of most financially stressed team in the Premier League. It's the only title either is going to win.

j.nisse@independent.co.uk

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