PFI: Long live the reformation

With the government hesitating on providing any clear details of its plans for the future of PFI, the pipeline for social infrastructure projects in the UK is looking increasingly thin. And this isn’t just bad news for the industry. It is ultimately the general public who will suffer if we fail to replace ageing, inadequate social infrastructure at a time of unprecedented population growth.

A number of ill-advised applications in the two decades following PFI’s inception have exposed inherent flaws in the system and, inevitably, associated PFI with waste, mismanagement and even exploitation.

So, if we accept that PFI cannot continue in its current form, we are left with three options: we can abandon the model entirely and risk throwing the baby out with the bathwater; we can look simply to tweak the existing PFI model and press on with new projects, hoping that history does not repeat itself; or we can seize what is a unique opportunity to drive through fundamental reform of PFI.

There are question marks over whether the public sector knows exactly where PFI went wrong, or possesses enough skill and experience to procure PPP contracts
cost-effectively

We must choose the last of these; a range of separate factors are now emerging, which, when combined, could lead to the reinvention of PPP in the UK if leveraged correctly.

First, the non-profit distributing (NPD) model introduced in Scotland offers some interesting ideas to be considered for the PPP structure and a viable starting position from which to build a new model south of the border. It has so far not suffered from the adverse publicity which has plagued PFI in recent years as it caps the returns which can be made by the private sector, although it would be fair to say that there are additional issues relating to investor returns that need to be tackled. In exchange for caps on returns, NPD sees the public sector take on more of the risk around changes in the law, title risk and energy costs, which in turn increases value for money for the taxpayer. Are there other elements of risk or guarantees that, in the “new world”, the public sector should consider taking?

Second, the industry is crying out for more work to go after, and is therefore likely to be more willing to offer competitive pricing. In addition to this, with more of the risk sitting with the public sector, bidders would have to price in less risk (which the public sector is in a better position to manage) in any case, and may therefore be more comfortable with financing projects at a more cost-efficient level.

Third, the government has made no secret of its desire to tap into pension fund resources in order to provide cheaper long-term funding for infrastructure projects. Institutional investors are always in need of safe places to deploy capital at a reliable and predictable rate of return, and such an arrangement would see the public benefit both from the much-needed infrastructure itself and, through their pension schemes, from the income being generated by the asset. The government will need to work very hard with the pension funds to ensure that flexibility is maintained in the funding for the life of the asset, however.

Of course, some hurdles remain. There are question marks over whether the public sector knows exactly where PFI went wrong, or possesses enough skill and experience to procure PPP contracts cost-effectively. And we still need to address the problem of who finances projects during the riskier early stages before they become secure enough to attract pension fund investment, and how they are rewarded for doing so.

One thing is clear, however. We all stand to benefit from the reform of PFI. If engineered correctly, a new model could see the government able to deliver better services to taxpayers, the industry having a more secure pipeline of work to go after, pension funds investing in reliable, long-term income-generating assets, and all of us enjoying new, modernised social infrastructure as well as a share in the profits. So, for the sake of our country, let’s grab this challenge with both hands without delay.

Steve Beechey is group investment director and head of education for Wates