What to expect in 2023: Energy, handback, more energy (and inflation)

As a new year begins, we take a look at the main topics likely to dominate the PPP landscape in the UK over the course of 2023

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“I am increasingly impatient at the world’s inability to focus on the really big things that are happening,” says Richard Threlfall, global head of infrastructure, government and healthcare at KPMG. “Infrastructure policy anywhere has to focus on decarbonisation and the UN Sustainable Development Goals.”

He is not the only one hoping to see a significant change in gear from countries around the world in 2023 when it comes to delivering on warm words regarding climate change and the energy transition.

In the UK, the push for change has not been helped by the political turmoil that the country faced, with three prime ministers over the course of 2022. While most will be hoping (expecting?) a far less rocky year in Westminster, there is no doubt that the Conservative administration has been badly wounded and trying to regain some economic credibility will be top of the agenda for current prime minister, Rishi Sunak, and his team.

That may mean being more cautious on investment, as plans to open the chequebook in Whitehall will be closely watched by those in the City, with plenty of jitters still around that a plan to spend money could result in further economic upheaval.

“Confidence is coming back,” says Mark Baxter, divisional managing director at Galliford Try Investments & Facilities Management. Nonetheless, he points out that deals in the private rented sector, where he has been doing some work, have “had to be re-evaluated”. He continues: “You can’t turn deals off and come back to them in a few weeks: if they don’t get over the line on the day that is expected, then you have to keep revisiting whether it stacks up [because construction inflation is moving so quickly].”

Inflation looms large over every government investment, but sitting still and doing nothing is not a realistic option. “As an industry, we will need to be agile in terms of getting projects closed and keep an eye on drift, which is a classic way to manage the politics and reality of available budgets,” adds Baxter.

In this context, it might be anticipated that the government would be willing to take another look at some of its policies around the use of private finance - perhaps specifically to support its manifesto pledge to deliver ‘40 hospitals’. Since the 2019 General Election, that promise has been watered down, but many in the industry still believe the government simply does not have the cash to see through even a more meagre pledge to renovate or provide extensions to some of the 40 hospitals.

As a result, there are increasing calls for the government to dip its toe back into the private finance world to support the delivery of health infrastructure. “There has to be a softening of private capital around the ancillary elements of hospitals, for example energy centres and car parks,” says Zoe Watters, partner at PwC. “There needs to be a more cohesive strategy around government capital.”

However, experts suggest such a move is unlikely in the near term, with the Department of Health seen to be one of the most strident anti-PFI ministries within government, making any introduction of similar models difficult. One source suggests that some health trusts that have explored the possibility of using private finance to help meet their needs have been quickly shut down by central government.

Could a route back to private finance in social infrastructure therefore come via a different ministry, such as the education department?

School infrastructure is still in demand and the estate has never really recovered from seeing the £50bn-plus Building Schools for the Future (BSF) programme axed in 2010. The Priority School Building Programme that followed it barely touched the needs of many areas, particularly as schools had begun to put off routine maintenance in anticipation of getting a new building under BSF.

“It would be fantastic if we could revive the level of ambition that sat behind Building Schools for the Future,” suggests Threlfall - although he and others agree that this is unlikely to emerge any time soon.

He does, however, argue that such an approach could help to drive innovation and allow the UK to take a lead on the global stage: “For the industry, this would be a great opportunity to put into practice the ambition around transforming infrastructure: for example, entirely offsite manufacturing; digitally enabled programmes. They could invest in ensuring a circular, decarbonised supply chain.”

This is the sort of work that has been the focus of the Welsh government’s schools programme under the mutual investment model (MIM). Two schemes reached financial close under the WEPCo project company towards the end of 2022, and the hope is that many more will follow in 2023 and beyond. A small but potentially sustainable pipeline for the Meridiam-led partnership.

Unfortunately, the MIM model itself looks unlikely to involve many more new projects. While the Welsh government has been pleased with the success of the scheme to date, it has shown little appetite to develop a new pipeline of projects. It will remain a tool available to Wales, but looks likely to be used only on an ad hoc basis for discrete projects.

So if not social infrastructure, where will we see private finance in the UK? The mantra for the past decade has been on economic infrastructure such as transport, but road and rail projects are unlikely to be delivered under a private finance model in the near future.

One exception here could be the A9 in Scotland, with a decision on the potential use of the MIM model to deliver a section of the road now with ministers and due in early 2023. While a positive decision here would undoubtedly be a boost for the industry, the fact that this scheme has been talked about by the market for many years now shows what a dearth of opportunities exist in this sector.

One source is sympathetic to the challenges the project faces, but believes a decision one way or the other is vital: “It is a difficult sell when you have the green agenda, but there are safety issues to consider if you do nothing.”

One area of transport that could see the benefit of private finance in 2023 is public sector fleets - from buses to (eventually) blue light fleets. These are areas where it is thought the green agenda might be able to make some in-roads, and while the technology may still be a little too early for emergency vehicles, buses could provide the perfect testing ground.

Investment is certainly needed to boost take-up of electric vehicles, but it is also required if the public sector is to decarbonise its fleet and replace diesel buses and local council administrative vehicles with electric alternatives. Depots and other possible charging points across an authority’s road network could be funded via a PPP model - which would also help to ensure that these facilities remain in service.

As many with their own EV will testify, one of the biggest frustrations at present is not simply the lack of charging infrastructure - but that there is no guarantee that charging points will be working when you do manage to find one.

Watters equates the potential here to the street lighting PFI deals that were delivered at the start of the century. Many of these are still quietly running successfully, suggesting that if a similar model can be established for the delivery of fleet EV infrastructure, it could be a sustainable approach.

Threlfall also sees EV charging as an area for more focus in 2023. “I don't accept that this is better left entirely to the private sector: at a minimum the government needs to provide standards to operate as a single network,” he says.

“The government needs to help people who live in high rise blocks, for example, to be able to charge their vehicles.”

2023 could be a good year for energy retrofit projects. Baxter points out that Galliford Try has already done a lot of work in this space, establishing its Carbon & Energy Property Pathway Assessment (CEPPA) tool to help clients work out how much money and carbon they could save through relatively small changes.

Once again, though, central direction would give this sector a significant boost. “There is not yet a great common language or central guidance around Net Zero, and there is a need to ensure people are doing the right things,” warns Baxter. “An authority can spend a lot of money without much benefit on these things if they aren’t careful.”

Threlfall agrees there is a significant opportunity, adding: “It creates a whole new market that would be encouraging an industry of the future, that the UK could then export to other countries.”

From Baxter’s point of view, much of the work around retrofit can also be part of the conversation he and others are beginning to have around the handback of expiring PFI contracts.

“We will invest in solar, for example, and sign a power purchase agreement with the authority,” he explains. “After 10 years it will be paid off and the authority will be left with the energy source.”

This type of win-win for the parties in a PFI deal reaching the end of its life is something that many would like to see rolled out more readily, supported by government directions. At the moment, the problem for Baxter and other investors is that where there is any uncertainty or suspicion from any of the other parties, costs can quickly spiral to the point that a scheme becomes unaffordable: for example, if the public sector, banks and any other stakeholders start demanding to have their own advisors take a look, time and costs start to mount up quickly.

Nonetheless, there is hope that the joint goal can help steer some deals in this direction - and 2023 will be when many of these conversations begin. “There seems to be a lot of talk around Net Zero, especially around PFI,” says Watters. “It would be wrong not to do this, but given some of the relationships it might be hard to achieve.”

We have previously covered the issues surrounding handback in some detail: these will not go away in 2023 but their focus will no doubt be made even sharper as time continues to tick by. The industry will be watching with interest the outcome of the independent report into behaviours in PFI contracts, recently announced by the infrastructure & Projects Authority (IPA).

Due to report back towards the end of the first quarter of 2023, the industry will also then be keen to see what, if any, actions the report’s recommendations trigger.

Rather than new projects, then, it may be the effort to repair old relationships that defines the UK’s PPP market in 2023.