The confidence trick
A survey carried out by Partnerships Bulletin into industry confidence ahead of this year’s National Infrastructure Plan (NIP) has highlighted the gulf between political rhetoric and economic reality.
Looking back over the past 12 months, the survey gauged what progress those in the partnerships industry had seen from government since the last NIP, and weighed up whether people believe ministers will stick to their plans in the years ahead.
Unfortunately for the government, the response was an overwhelming no. The vast majority of respondents doubted the government will deliver on its promises of a new infrastructure pipeline and billions of pounds of investment.
“The UK industry has provided the model for international investment, it’s ironic that the UK is now dismantling its capability,” says one respondent.
“The market’s inherent optimism-bias is being stretched to breaking point by current deal flow. Achieving £200bn of investment will require a Herculean effort from bothpublic and private sectors,” says Andy Briggs, at law firm Hogan Lovells.
Respondents are frustrated both with this lack of dealflow, but also the government’s failure to offer any direction. “The government has created an atmosphere of confusion and uncertainty, muddled policy and seriously lagging behind infrastructure planning [and] project timelines,” says Malcolm Iley, at lawyers Trowers and Hamlyns. “It’s dire out there.”
That is bad news for Chancellor George Osborne and others at the Treasury, as they seek to encourage participation in the PFI review announced in November. Osbornepromised to do away with the old-style PFI model, and in its place provide a new approach to infrastructure investment from the private sector.
But unless he and others at the Treasury begin to engage more closely with the industry, talent will have drifted away from the partnerships arena, seeking new hunting grounds and more abundantly available work.
Last year, when the first NIP was launched to great fanfare from Prime Minister David Cameron, all the talk centred on the promise of a £200bn investment in infrastructure by 2015. The majority of that was anticipated to come from the private sector.
But fast-forward a year, and the industry is far less excited by the promise. An emphatic 88% of survey respondents said they did not have confidence that the investment would be delivered. “It is difficult to see when these projects will move into procurement and, if they do, where the private finance backing will come from,” says Cathy Ley, of law firm Rosenblatt.
Others argue the problem will lie with the pace of progress – especially as a year since the announcement has been made, there is still little sign of that money being spent. Robert Marr, at technical consultancy Appleyards, points to the difficulties faced by previous administrations when trying to get large infrastructure programmes off the ground.
“If you compare with the problems they had with the proposed Building Schools for the Future spend of say £50bn, the £200bn is definitely going to be missed.”
Another respondent is even more damning: “Major procurements always set out with too optimistic a timetable and initiatives like this lose their urgency once out of the spotlight and without very effective political leadership.”
That apparent lack of leadership has been acutely felt by the partnerships industry over the last 12 months. When asked about the level of consultation from government on the future for private investment, 75% of respondents say there has not been enough engagement with industry.
There is far less agreement over what government should be doing, however.
Some respondents are highly critical of the decision to review PFI and tinker with themodel, rather than work on the pipeline and get schemes up and running. “Too much consultation, not enough deals,” says Marr. Another adviser in the poll agrees clarity over the investment pipeline remains more important than copious consultation.
But others argue ministers and officials should be taking time to discover what the private sector needs to deliver the government’s infrastructure programme. “Much further debate and dialogue is necessary to access greater pools of liquidity,” says one investor, “including institutional investment and shorter-tenor financings.”
The survey therefore suggests that while the industry might understand Osborne’s decision to review PFI in the hope of developing an improved model, he has taken too long to reach this point. Instead of waiting more than 18 months since coming into power to launch the review, he may have been better taking a leaf out of Education Secretary Michael Gove’s book and getting the work done immediately.
Such a move might have meant the UK would now be in a position to launch a raft of new, improved PFI programmes that could help see the country through the growing financial crisis in Europe and other parts of the world. As one respondent puts it: “The government needs to do, not consult.”
Either way, the message to government is that its previous approach of rolling back the public sector to allow the private sector to flourish is not enough on its own. Without direction, guidance and support, the private sector has been unable to take up the slack and as a consequence infrastructure investment has stalled.
There is also a growing feeling that the government – and Treasury in particular – has been far too willing to let the model be attacked.
As a result, 82% of respondents believe the negative publicity will affect the future of the partnerships sector, making it much harder for business to be done. “Recent reporting has been profligate, inaccurate and stupid,” says John Davie, of advisory firm Altra Capital.
His view is supported by a number of experts in the partnerships world who are frustrated with the perception that private finance has been bad for the country. “With a thousand signed UK projects, is there really no positive aspect to comment upon?” asks one respondent.
Another is critical of the government itself here, arguing it has “allowed anti-PFI sentiment to either drive away investment or raise the cost of funds”.
The signals coming from the media and in some cases ministers have been so negative that it is even affecting UK companies operating overseas. One source warns thatbeing associated with UK PFI has caused business to suffer when attempting to sell the model or even win work in other countries.
So how can this situation be turned around? Must the government simply get rid of PFI and start again from scratch?
Respondents to the survey suggest there may be a better way to tackle the problem. Ley, for example, argues that there will be a “renewed appetite for private finance” from the public sector as the need to deliver economic growth becomes more pressing. With figures suggesting unemployment is on the rise, and the Bank of England talking about a stagnating economy, Cameron and Osborne may decide they need PFI more than they need to placate the model’s critics.
One adviser says the government may be doing the right thing by announcing a fullblown review of PFI to help deal with the negative publicity. “Restructuring and renaming partnerships, perhaps developing institutional PPP models and perhaps with employee participation in some cases, may overcome this damage.”
It means there may well be a way back for private finance. The government has been working on a new model to bring more pension funds into the market. Whether this would be enough to stop the criticisms seems unlikely.
But ministers may not be too concerned anyway. The economic difficulties look set to force Osborne’s hand. He may prefer to take some flak for reviving a model he has previously described as discredited than see the UK slip back into recession.
Even before the coalition came into office, most in the industry expected to see PFI rebranded and relaunched, much as has happened with Scotland’s non-profit distributing model.
The problem is, no-one expected it to take this long before the review process was even started. Most had hoped that by now, the new model might be in place.
Since the government came to power last year, it has launched a raft of measures in the infrastructure arena outside of the NIP. There has been the promise of a Green Investment Bank – something that is still being developed, but will not initially have the borrowing powers many had hoped for.
Then there are the efforts to make savings. Infrastructure UK’s engineering costs review promised to deliver £30bn of savings over a decade, but some critics have suggested the money will only be saved because there are no projects to do. And last summer, Lord Sassoon unveiled his review of operational PFI contracts, aiming to save £1.5bn across the portfolio.
But there is little confidence in the industry that any of these pledges can be met. Over 60% said they doubted the operational PFI review would make such savings.
However, one industry professional offers a more upbeat assessment. Tony Roper, a partner at InfraRed, adviser to investor HICL, says quite significant savings have already been identified on some contracts. “We are involved in two pilots. In one, the per annum total saving identified was nearly 8%.
“Now it is about changing the scope of that contract to get those savings.”
While he is confident the projects – and other schemes – will make ground in trying to cut the overall operational costs, he admits some will be easier than others. “There are certain investments of ours where there is no public sector contract manager,” he says, pointing out that this will make it much more difficult to work through the contract and generate savings.
What this shows, perhaps, is that the overall mood of the industry may be more pessimistic than the evidence on the ground warrants. Negative perceptions may dominate, but that may have as much to do with the government’s recent approach as the reality of the situation.
Nonetheless, the survey makes it abundantly clear that there is a huge amount of work to be done if ministers want to persuade a sceptical industry that they have the tools and will to see through their bold promises.
One respondent sums up the mood: “While I like the aspirations at ministerial level (which recognise the difficulties faced due to the economy), I have very little confidence in the underlying bureaucracy to deliver any real change or embrace any real innovation.”