Is it time for a new generation of public-private partnerships?

The UK needs infrastructure. And the government needs money to deliver it.

The Institute and Faculty of Actuaries (IFoA) has been researching ways that the UK government can attract private finance to fund this investment.

As the chair of the institute’s infrastructure working party, I’ve been leading research into new ideas for public-private partnerships (PPPs) to replace the old private finance initiative (PFI).

What was the private finance initiative?

Launched in 1992, the PFI was a procurement model used by the government to create PPPs to manage public projects.

The PFI proved controversial, for many reasons:

• It became perceived as expensive, particularly as public budgets tightened.
• The arrangements were inflexible and hard to amend to meet changing needs.
• Investors became less willing to negotiate because they found themselves substantially out of pocket when proposed deals weren’t completed.

But whatever criticisms people had, the fact remains that without it, we wouldn’t have many of the new hospitals and schools we have today.

This isn’t a plea to reinstate the PFI. But we do need a debate on how investors, public bodies, engineers, and others can form genuine partnerships that produce better results for the UK.

Our work at the IFoA aims to stimulate that discussion.

A new generation of public-private partnerships

I therefore suggest a much simpler model for new PPPs, based on the following principles:

• Unlike the PFI, the public body won't receive services like catering, cleaning, and routine maintenance.
• The investors will handle construction and commissioning based on plans and specifications agreed by both sides.
• The investors will receive bids for construction contracts and the chosen contractors will bear the usual risks.
• The investors may lower the risk of over-spending on construction and commissioning through new, collaborative forms of insurance.
• The completed asset will normally be leased to the public body for 20–40 years. In return, some of the money earned is payable to investors. At the end of the term, the investors will hand the asset to the public body free of charge.

Project development

Experts and managers appointed by both sides will form a joint project team.

Their first task will be to appoint an experienced project manager, who will help the team visualise the project, identify the risks (including climate risks), and decide how to address them.

The team will develop risk management and financial arrangements, including a proposal for the length of the lease and how the two sides will share revenues.

To keep the cost down, debt guarantees may be sought from the National Wealth Fund (formerly the UK Infrastructure Bank) to ensure no party is left out of pocket.

The public body will hand over the land needed for the project, get planning permissions, and arrange the supply of utilities.

The project team will draw up detailed plans and specifications for the asset, which both sides will sign off before appointing contractors.

The team will also draft a “heads of agreement” for the contracts, which will set out each side’s responsibilities and cover audits, accountability, and arbitration.

What about projects that don’t go ahead?

Projects that don’t proceed to construction can waste time and money, discouraging investment.

To reduce this risk, I propose two steps:

• The public body will always carry out a feasibility study before engaging with investors.
• If the project is abandoned before construction starts, the public body will reimburse the investors up to half of the money already spent.

Advantages

So, what are the advantages for each side?

Investors

For investors, infrastructure offers an opportunity to diversify their portfolio and spread risk.

Projects that meet or go beyond expectations can offer competitive returns on investment.

Public bodies

For public bodies, more investment means getting more of the infrastructure they need.

They would have access to a wider pool of innovative ideas than if they developed the entire project themselves, which would often improve the quality of the end result.

Construction would be less risky, and management of remaining risks might improve.

The approach could also offer more flexibility to meet changing needs. Particularly, for assets that can be designed in ways which would enable them to be repurposed or sold if no longer needed.

Semi-permanent partnerships

This suggested framework could work for single investors carrying out just one project with a public body.

But could it be adapted for a semi-permanent partnership with a group of investors to deliver several projects?

I think it could be very suitable for a partnership with a regional or larger local authority, for example.

The variety of assets would diversify risk for investors. And prolonged team working would improve efficiency and continuity for both sides.

Participate in the debate

Whether or not you agree with the ideas in this article, I hope you’ll participate in that debate.

A new ICE Next Steps programme is looking at alternative funding ideas for UK infrastructure.

Read the briefing and respond to the call for evidence.

You can also contact me directly. Email the ICE’s policy team at [email protected] if you’d like them to put us in touch.

You can read more about our ideas for the future of public-private partnerships at actuaries.org.uk.

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