There is continuing bad press around PFI. Probably the most extreme has been the shadow Chancellor, John McDonnell, stating at the Labour Party conference that a Labour government would bring operational PFIs back in-house. This was followed more recently by Labour supporting amendments to the government’s finance bill, to enact the March Budget, that are focused on the profits made by PFI companies and the case for a windfall levy.
Regardless of Labour's recent announcement, the current government has not exactly pushed ahead with PF2. There was a mention in the Autumn Statement in 2016 of a potential pipeline of PF2 projects to be announced in early 2017.
But there has been no further announcement to date.
Conversely, Scotland's private finance model has largely been a success story, led by the Scottish Future Trust with its Non-Profit Distributing (NPD) model and with the Hubs. Similarly, Ireland has a pipeline of projects and Wales has announced its MIMs.
PPPs continue to be used by local government, universities and other public sector bodies through the development of public sector land to deliver student accommodation, housing and other social infrastructure. NHS trusts seek similar benefits with strategic estates partnerships. With the devolution agenda continuing, combined authorities now have the power over spending on, inter alia, transport and skills giving them more freedom to tailor services to meet local needs, support local businesses and create jobs.
With the ongoing housing crisis there has also been a focus on housing-based PPP models. PRS schemes take a leaf from the student accommodation model: a good location with good transport links, superior design quality with a good management/concierge offering, in an area where there is a shortage of suitable housing. This also appeals to institutional investors as this is long-term and stable income flow, with a social purpose.
The combination of the devolution of power to cities and local authorities, together with strategic partnerships with local health trusts, gives private sector partners the opportunity to be the local delivery partner for transport, housing, education and other local infrastructure and service needs.
Although there have been few PF2 announcements, there are a number of central government mega-economic infrastructure projects which require private sector funding and investment. This includes Silvertown Tunnel, Hinkley and HS2.
Interest rates continue to be low and institutional investors are looking to invest in infrastructure. However, institutional investors typically have less capacity in terms of staff and are uncomfortable taking any sort of construction risk which leads to hybrid funding structures with banks.
There is also the potential use of the UK Guarantee Scheme to de-risk projects where appropriate. The government will struggle to access the liquidity from the institutional markets that these mega-projects are going to require without a model or product in which institutional investors can invest.
There is also the question as to how the government hopes to deliver the National Infrastructure Commission's recently published National Infrastructure Assessment (NIA) of its 'vision' of the UK up to 2050, without PF2 or its equivalent. The NIA identifies long-term infrastructure needs and highlights priority areas for action over the medium-term.
The seven key areas examined in the report include: ‘Financing and finding infrastructure in efficient ways’.
Specifically in relation to this area, the report identifies that “access to private finance will continue to be key to serving the UK's infrastructure needs”. It states that the “government has a role to play in securing private finance: for example, mitigating the risk created by government for rolling stock providers” and that it must “act to maintain and strengthen the conditions for private sector investment in light of new uncertainties”.
Acknowledging that the European Investment Bank (EIB) may leave the UK market as a result of Brexit and that the role of the Green Investment Bank may also change after privatisation, the commission states that it “will look at the need to fill the gap and the options for doing so, including the potential for a new UK institution”.
In its report, the commission acknowledges that while the “UK was once a leader in public-private partnerships…implementation has stalled”. It points to a “lack of consistent evaluation of past projects” making it “difficult to draw reliable conclusions on the whole of life costs of comparable, publicly funded, projects using private finance compared to those wholly financed within the public sector”. Accordingly, the commission plans to “consider where new procurement and financing mechanisms are best suited to help meet the UK's infrastructure needs”.
Identifying these key issues in relation to the government's role in securing private finance, the gap that may be left if access to the EIB is lost, and assessing infrastructure financing options, were the first steps for the commission. As part of the next stage of assessment, the commission will consider the potential solutions identified above.
Whatever happens next, any initiatives requiring private finance are likely to face growing public scrutiny and an increasingly disinterested construction and investment industry, as long as there is no new pipeline of projects. As is apparent from the commission's recent report, there is no shortage of social and economic infrastructure projects that require private finance. For PF2 it must be time for a rebrand.