Government must learn the right lessons from PFI
A new Public Accounts Committee report warns that the UK’s infrastructure ambitions risk failure unless government provides reliable, consistent investment signals and learns from past mistakes in private finance, writes Geoffrey Clifton-Brown
The government’s ambitions for infrastructure – the new schools, hospitals, energy, road and rail projects to drive economic growth and serve future generations – will depend in part on its ability to crowd in private investment.
The Public Accounts Committee which I chair has today published a report on government’s use of private finance for these programmes. Our inquiry makes clear the harm that has already been done by the uncertain infrastructure environment in the UK – skills and labour have gone elsewhere in the world, weakening what is available for successfully delivering projects.
This applies to both public and private sectors – public bodies without the commercial skills to successfully manage these schemes, and sectors, including the construction industry, lacking the workforce to deliver on the government’s strategy. Our Committee seeks a well-articulated plan for building those skills back, which will take time.
To repair this damage, it is necessary for government to return to the very basics: that investors place a high premium on reliable and consistent information. As things stand, only a dim view can be glimpsed of the landscape. This is because the information that has been published through the current infrastructure pipeline is simply not credible. In an ideal world the pipeline would provide an authoritative menu for investors of the next 10 years of public projects – but no detailed information has been available on when projects would be delivered, or any analysis published on past performance.
Pipelines have not been comparable year on year – indeed, nothing was published at all in three of the years between 2019 and ’22. It is welcome that government has committed to publish a six-monthly pipeline on which financing models will be supported and when, with a publication expected this month. But although government’s commitment to change this is a start, this month’s publication won’t suddenly transform UK infrastructure into investor catnip. A long-term and regular drumbeat of content-rich projections from government, is what will allow investment plans to begin to be put in place.
Government needs to be crystal clear at the outset of any project what the balance between capital costs and maintenance costs over the lifetime of the scheme are. For example, HS2 could either have had its rails built on cinders at considerably lower cost, or alternatively on concrete, where initial capital costs would be much higher but long-term maintenance would be lower. Contractors need to know what those costs are at the very beginning, so they are able to intelligently plan. As much information should be put in the public domain as possible so that government, private sector and the public know precisely what they’re getting into.
The failings of PFI
The pipeline will also be the outlet through which government can make clear what it considers is the right private finance vehicle for the right project. The failings of Private Finance Initiative (PFI) schemes are well-publicised. The badly-built hospital needing millions in maintenance or remediation fees; the school forced to trim its playing field grass perfectly down to the centimetre for fear of charges from a private firm. These kinds of poor-quality PFI deals have understandably tarnished the model’s brand with the public.
While some infrastructure would not have been built without PFI, public bodies are now on the hook for £136bn in fees to PFI companies up to 2053. Half of these contracts will expire within the next decade, and my Committee has long warned of the impact on the nation’s finances of assets returning to public bodies in a poor state.
It is fair to say, then, that the government’s 10-year infrastructure strategy has arrived at a time when the very concept of private investment in public assets is fraught with challenges both political and practical. If the ambition for private finance to help support public investment is to be truly achieved, the mistakes of the past must be avoided.
A key lesson that must be learned in this area is one of mindset. Our report identifies a misplaced belief – that transferring risk to the private sector means that the risk now lies elsewhere. But in risk management terms, this is like strapping a timebomb to a boomerang. As we saw in the case of Carillion, if suppliers of critical infrastructure fail, the buck stops with the government.
So before private finance’s involvement is considered, public bodies and their private partners should have the benefit of a comprehensive framework, set by the centre, with a recognition that not all risks can or should be offloaded to the private sector. The public sector will always be able to borrow more cheaply than a private business can for these projects. So the whole purpose of a well-founded public-private partnership is to pass on an element of risk. If this equation doesn’t balance out and the risk is intolerable – for instance, if the government is liable to have to finish a project itself due to supplier failure, then the project might just as well be fully publicly-funded.
It’s just a question of getting the balance right. The expected risk needs to be taken by the private sector, but unexpected catastrophic risk could be guaranteed by the government. A useful example of this is the Tideway Tunnel, where government indemnified the contractor against the risk of tunnel collapse during construction.
With those guardrails firmly in place, government can move to more confidently seek the benefits that a well-incentivised private counterparty can bring: access to high levels of skills and experience, which can lead to better outcomes.
I have seen in my own constituency how a PFI arrangement for roads maintenance functions perfectly well. Robustly-managed partnerships with the private sector can help relieve some of the burden from the state’s broad shoulders. This is not some abstract argument over how various projects will be delivered. The delivery of the nation’s future infrastructure, which will have a direct bearing on the quality of all of our lives, rest on getting this balance right.
Sir Geoffrey Clifton-Brown MP is Chair of the Public Accounts Committee