The Raven's Blog

19.11.18

PFI is gone, but the need for private money will not disappear

Alan Bermingham, policy manager at CIPFA, analyses the government’s decision to abolish future use of PFI/PF2 funding arrangements.

Many people were caught by surprise when the chancellor announced PFI/PF2 contacts will not be used for future projects, effectively abolishing a funding model first introduced in 1992.

It is understandable why the chancellor has seen fit to call time on the existing PFI/PF2 funding arrangements, with many of the earlier contracts having been criticised for not delivering value for money. The government itself revised the original PFI arrangements in December 2012 into what is now PF2 on the basis of increasing transparency over the internal workings of contracts and equity returns made on these investments by the private sector. 

However, it is worth paying close attention to the careful choice of wording used by the chancellor, who said he remains ‘committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector.’ He also confirmed existing contracts will be honoured, and starting in the health sector, a centre of excellence will be established to actively manage these contracts in the taxpayers’ interest.

With the pipeline for projects funded through these contracts greatly diminished, this is likely to have little effect in the short-term. A National Audit Office report said that capital investment under PFI arrangements has significantly decreased since its peak in 2007-08. HM Treasury’s PFI database at the end of March 2017 shows only one project in procurement, and that is a waste infrastructure project in Northern Ireland.

The uncertainty lies in how projects are to be fully funded in the medium- to long-term. In health, the government confirmed its support for the recommendations in the Naylor Report, which recommended a package of £10bn investment in NHS property and estates. The government is supporting this with £3.5bn of new capital investment, £3.3bn to be raised from the sale of surplus land and buildings, leaving £3.2bn to be raised from private finance.

Defence estates too are facing a £2bn gap between the capital investment needed and the available sources of funding according to a Ministry of Defence (MoD) report. The report also alludes to ‘the MOD continuing to explore alternative funding sources, such as PF2 or other finance mechanisms, to meet the remaining £2bn requirement.’

The chancellor noted in his budget speech that half of the UK’s national infrastructure pipeline will be built and financed by the private sector, referring to the figures identified in the Infrastructure and Projects Authority report, which shows a pipeline in 2017 of £460bn total public and private investment across economic and social infrastructure. Of this pipeline, £240bn is to be delivered by 2020-21, and £220bn after 2021. However, this includes utilities and energy, where the investment is solely in the private sector.

Once we remove utilities and energies investments, there is still £13.7bn of project funding from the private sector spread across transport, social infrastructure, digital infrastructure, science and research, and flood and coastal protection up to 2021. But the need for alternatives to public funds does not disappear after this date.

Finance professionals in central government will be looking to the 2019 Spending Review to address this long-term uncertainty. However, right now there is little detail. If there is to be no PFI/PF2 projects taken forward, does this mean that the government is willing to increase its borrowing to allow for bridging the gap on identified capital investment? Or is there likely to be a revised and updated version of financing arrangements between the public and private sector that has yet to be progressed?

In many other parts of the world, governments are moving forward public-private partnership (PPP) pipelines, having looked at UK best practice and the lessons learnt. CIPFA itself is one of few organisations able to train the World Bank’s PPP/ CP3P course, including administering the pilot training of the private finance unit in Rwanda – who have since won awards for their projects. Indeed, from an overseas perspective, the announcements on PF2 might look odd. However, they make more sense if the alternate is now wider PPP arrangements.

While there should always be a focus on the total lifetime costs of projects, this is not the only component of overall value for money. PPPs need to be able to demonstrate delivery of real outcomes for citizens to be able to justify any additional cost that may be incurred. Introducing any new PPP schemes will not be easy, as the government has given themselves a bit of a tightrope to walk. Unless we see a significant departure from PFI/PF2, this announcement could be dismissed as a simple rebranding exercise.

Top image: Yui Mok via PA Images

 

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