The big rebrand

1 March 2012 As the government considers a new PFI model, it must also rehabilitate the procurement tool’s tarnished image, writes Paul Jarvis
“If Geoffrey Spence goes on for much longer [about PFI], no-one is going to be interested in British expertise overseas,” warns a source who works closely with the government trying to promote the UK abroad.

Having seen Chancellor George Osborne and fellow Treasury minister Lord Sassoon travel the globe calling on countries and companies to invest in the UK, the source is particularly frustrated that the Treasury official in charge of infrastructure has been giving such a negative impression.

Over recent months, Spence, Infrastructure UK’s chief executive, has been highly critical of the PFI model, insisting that the whole of Parliament is united in its dislike of the tool.

Nonetheless, there remains a strong appetite in central government to bring private money into public infrastructure. The Treasury’s review of PFI closed for evidence in February, with the government’s first response expected in March’s Budget. Some in the industry are relieved Osborne has decided to review PFI, rather than scrap it altogether.

“[The government] must be serious about doing something at the end of the review, because it could have just said ‘we’re not doing PFI anymore’,” says Nabarro lawyer Stephen Matthew. “So I am optimistic we’ll get something out of it at the end.”

The reputation of PFI in the UK is in tatters, but it needn’t be terminal. The acronym itself may struggle to survive, though: when discussing the Priority School Building Programme, Spence is at pains to point out it is a “privately financed” model, not ‘PFI’.

Indeed, most anticipated a change of name when the coalition first came to power. But the unrelenting attacks on the model that have taken place over recent months from top-ranking ministers (including Health Secretary Andrew Lansley, Education Secretary Michael Gove and Osborne himself), have made a simple rebadging exercise almost impossible.

If the anti-PFI rhetoric and scepticism of the past is to be overcome, there will need to be a major public relations assault.

From the private sector side, that may at last be underway. A new body is currently being formed that may provide a strong voice for the private firms involved in partnerships projects.

Currently in its early days, the organisation is likely to be formally launched after the government has formulated its new PFI model. But it is understood several major contractors, plus technical, legal and financial advisers, have already signed up to the plans.

For years, the industry has been criticised for failing to stick up for itself when attacked, with people preferring to keep their heads below the parapet rather than face the firing squad in the press. It’s a criticism that Spence himself has made in recent times, arguing that the private sector “has not made its case on value for money”.

In the past, this role has always been left to the PPP Forum, but critics say that organisation is now too closely associated with Innisfree and its chief executive, David Metter – who is also the Forum’s chairman. Both the company and Metter personally have been pilloried in the press for the profits they have made through PFI.

“We need a new industry body that is independent and objective – and is seen to be independent and objective,” says one source. “The PPP Forum is now too associated with ‘old’ PFI to be that body.”

Although in its early stages, the new organisation might at last give some teeth to the industry, in the way that lobby groups in other sectors have done for many years.

There will be plenty of work for any new body to do. “It’s all very well us ranting to the government, but it’s had precious little impact so far,” says Nick Maltby, at law firm Bircham Dyson Bell. “It feels like shouting in a hurricane.

“So one has to worry about how we [as an industry] engage with this government.”

Why has it been allowed to get this bad? “It is to do with the fact we’ve not defended it enough as an industry,” says John Dean, at contractor Laing O’Rourke. He argues that part of the problem is there was never a need to defend it in the early days, because the government of the day was fully behind it.

“While Gordon Brown was Chancellor, he was trumpeting all these projects he was procuring,” he says. “Had we been justifying ourselves earlier, then we may not be where we are now.”

Neil Rutledge, at Grant Thornton, offers another analysis. “We are weak in our response because if we do hit back then we are seen as a cartel that is simply looking to support our own ends – we haven’t learned to get our clients and users to make the case for us.”

Many agree that defending the industry can come across as self-serving when undertaken by those on the private sector side. But there are plenty of public authorities around the country that have benefited from private investment in their infrastructure over the years. They could provide much stronger advocacy for the industry as a whole.

Leeds has been probably the most effective here, thanks to its dedicated PPP unit. “We are pretty unique,” says the organisation’s chief officer, David Outram. “We have been able to learn the lessons of the past, and check and challenge the visions of new projects to make sure they are appropriate.”

He’s clear on the benefits of the procurement model. “PFI has created 20,000 jobs over 10 years in Leeds.”

Outram also points to the West Yorkshire Police PFI scheme, onto which he has been seconded. “They had heard the stories,” he says, “but they have now become firm advocates of PFI.”

It might also be useful to include public sector representatives in the new lobby group.

“There has never been a sufficient body that represents the industry in the round – not just the private sector, but also the public authorities involved in these projects,” says one source. “The various sides of the industry don’t come together like that.”

Rehabilitating the public perception of private finance is not a simple task, though, even if all sides are properly engaged. Explaining it to the public is going to be difficult. “It’s a huge challenge for politicians and officials,” the above source adds. “How can you present whatever comes out of the review as sufficiently radical to appease people?”

The complexity of PFI deals, where the cost of the building is invariably dwarfed by the overall cost of the 30-year contract, is often missed. “Over the years, when the national press has quoted numbers, they have never been comparing like with like,” says Philippa Eddie, at consultancy Ernst and Young. “This has been a fundamental problem.”

Risk transfer is a particularly thorny issue. “We have not explained risk transfer as a justification for the higher cost of funding,” says Maltby. “It is difficult to explain. Even I can’t always work it out in my mind as to if and when a PFI project is better value because of the risk transferred.”

Perhaps even more important to the success of any new model, however, is the willingness of the government to get behind it. “The government just needs to provide some clear messages that it is absolutely behind the model,” says Eddie, “and re-emphasise that getting private involvement in public infrastructure is essential.”

Canadian High Commissioner, Gordon Campbell, agrees. In Canada, a lot of work has been put in at a high level of government to ensure buy-in. “It requires a commitment from the governing body,” he explains. “You won’t get the best product without the commitment of the procuring authority.”

Public knowledge
As the Treasury looks at approaches taken abroad, officials may also find some lessons on how to avoid the public relations problems of the past. “The Canadians are not hung up about the procurement method,” says Dean.

Before becoming High Commissioner, Campbell was Premier of British Columbia, when he strongly drove the province to use the public-private partnership model. Across Canada, the partnerships model has been used with some success and far less public opposition than has been the case in the UK.

Perhaps an important reason for this has been the role of the central state bodies in commissioning and running PPP projects. One contractor suggests the Canadian public sector is more competent, which is partly down to the fact projects are commissioned at state level, meaning experience and competence is retained from scheme to scheme.

Furthermore, organisations like Partnerships British Columbia (Partnerships BC) and Infrastructure Ontario have been excellent at setting out their experience, developing case studies for others to learn from. “Partnerships BC has been asked to go around the world to share its experience and offer advice,” Campbell points out.

In the UK, mistakes can often be repeated time and again because each local authority is using the model for the first time, and that apparent lack of competence reflects poorly on the model’s reputation as a whole. “I’ve come across some authorities who don’t know what they want,” says one source. “How can they engage in a competitive procurement when they don’t know what they want?”

Outram, at Leeds, agrees that understanding what is wanted before going to market is crucial. “Too many in the public sector believe the private sector will get them more, or it will be cheaper, through ‘innovation’.

“Authorities need to start with the rigour that the outline business case requires.”

Another consideration for the Treasury, is that it may be able to enforce stricter requirements on the private sector when formulating its new PFI model. One of the biggest public relations disasters for the industry over the past decade has been the perceived ability for private contractors to make huge profits without sharing any of it with the public sector.

When the UK was developing PFI, there may have been a tendency to err on the side of caution because of concerns that too strong an approach might scare away private investors.

As the likes of Canada and Australia learnt from that model and pushed the boundaries further, they were perhaps able to be stricter with the private sector.

Similarly, Scotland has recently pushed the boundaries further, discovering that contractors are willing to cap returns on their investment. First Minister Alex Salmond has also made a lot of political capital out of the fact the initiative is no longer called ‘PFI’, but the more public-friendly ‘non-profit distributing’ (NPD) model.

Critics argue it is essentially the same as PFI, and that the cap is merely a fig-leaf because it is set in conjunction with the private sector at the start of the contract – so is unlikely to be significantly lower than the rate of returns a contractor will see in a traditional PFI deal.

A strong approach
There must be something to be said for a simple change of name to go with the political bluster, though. “It seems to have worked very well,” says Eddie. Spence has been clear that the PFI review will not see the Treasury ‘do a Scotland’ and simply rebrand the same old model.

Whatever does emerge, though, it must do a better job of winning the public relations battle than PFI did.

“Reputation has got to be a key part in developing a sustainable model, not only for the public sector but for the politicians,” says Nick Prior, at consultancy Deloitte.

“They need to have a strong approach to make sure the Jesse Normans of this world are signed up to it,” he adds, referring to the Conservative MP who spent much of last year campaigning for a rebate on all PFI projects. “If they don’t get that, ministers are not going to sustain it in the longer term.”

A key element will be making potential critics realise that not every problem with a privately financed project is a result of the procurement method. Campbell warns it can be too easy for the public sector or opponents of projects to blame the private sector for outcomes that were not anticipated at the outset.

Separating the problems of bad commissioning, for example, from problems in the way a project is funded will be vital. Too often, a project that is too big, or built in the wrong place, gets labelled as a ‘bad’ PFI project. But as one source points out, the private sector is simply responding to what the public sector client has asked of it.

It is almost impossible to distinguish between these issues in most media attacks on PFI. So maybe the answer lies in tackling that problem of commissioning.

This comes back to the need for an experienced and knowledgeable public sector. “The public sector has to be very thorough at the beginning,” says Campbell. “You have to be clear what your requirements are.”

A strong and committed public sector is therefore vital to all elements of a sustainable new model for privately funded infrastructure. And in a world where image is increasingly important, a private sector that shows confidence in its model and can competently defend it will go a long way.

This page was last updated on:
9 May 2012.


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