“We need a relentless determination to unlock the pride and purpose of the whole country,” said UK Labour leader Sir Keir Starmer in a speech this summer. “To win this race, we need new institutions, new infrastructure, new investors and above all, a new mindset.”
Lines like this will make infrastructure players’ ears prick up, but critics will point out that this is the sort of thing that is sprayed out by any opposition, especially one that has very short odds on being the next government.
With a full manifesto not coming anytime soon, the industry is having to piece together what this mind shift could look like - and what role the PPP world might play in it. Hints have been coming in recent months, with Starmer saying things such as: “Day-to-day spending will be completely covered by the taxes we collect [...] let me be clear, our plans to borrow for the infrastructure of tomorrow come firmly within these rules”; “I’m not going to let slow connections to the National Grid hold back £200bn worth of projects”; and “Public investment crowds in private investment and provides long-term certainty.”
So what does the industry think of these hints? Is this the turning point in UK infrastructure back towards a centrally driven programme of investment involving partnerships with the private sector that has long been hoped for?
“Irrespective of the colour of government there are some fundamentals we need - particularly a long-term approach, and a coordinated approach that looks at regulation of sectors, tax, and a competitive market,” says Colin Simpson, head of asset management at Local Pensions Partnership Investments. “Pension funds want to invest in infrastructure and other real assets. The problem is the short supply of investment opportunities with good risk/return profiles – that help build the investment case. We would welcome the government playing a deal-maker role that would get projects off the ground so that asset owners can invest.”
Starmer's talk of a "genuine partnership" between government and the private sector certainly indicates a future dealmaker role, but it’s still unclear. Certainly, previous Labour governments have been partial to playing that role in the infrastructure market - and the starting point for Starmer’s might not be too dissimilar to Blair’s.
“If Labour does come into power, the situation will not be dissimilar for them to 1997 in terms of the restrictions they will face on spending,” reflects one UK advisor, pointing to signals from the bond markets that there can be no more borrowing.
Shadow chancellor Rachel Reeves has already started to create her own ‘golden rules’ like Gordon Brown did ahead of the 1997 election, something which created the fertile ground for models like PFI and PPP to really proliferate. Could we see something similar reemerge from the undergrowth?
“What Labour has been saying is fairly encouraging,” the advisor says, although noting that the party almost certainly won’t “nail their colours to the mast on private finance at the moment”.
But partnerships, in one form or another, absolutely have been nailed to the mast. Starmer followed up his comments about crowding in private investment with: “This partnership, this is the game-changer.”
The maths of Starmer’s green investment plans make partnerships a necessity. “The state clearly can’t do it on its own, it has to be done in partnership with the private sector,” Jonathan Reynolds, Labour's shadow business secretary, told a recent GIIA podcast.
Meanwhile the international situation is also being considered by Labour. Starmer has noted that “all around the world, our competitors are developing new frameworks to attract [green investment], and you better believe it – they are rewriting the rules of their economies”, pointing to America’s Inflation Reduction Act (IRA) as an example.
Given that the European Union has responded to the IRA with its own initiative - the Green Deal Industrial Plan - there is clearly a need for the UK not to see its energy transition programme squeezed by these two competing blocs.
But how the UK will rival moves like these will be a crucial challenge, because the bottom line is that it can’t afford to fire off a like-for-like subsidy package.
“We don’t have the economic firepower that the US has in terms of the Inflation Reduction Act or Europe has with its green new industrial plan; so we have to find an alternative way to encourage investment into the energy and infrastructure sector,” says one veteran UK-based lawyer. “We need to promote certainty and stability, and think about removing barriers to investment. It may not be headline grabbing, but it can be effective.”
For him, communicating stability is key: “Setting a long-term framework for investment is required.”
The lawyer points to smart meter regulation as an effective example of how regulation can encourage investment. In that instance, Ofgem’s requirement for all gas and electric suppliers to have binding smart meter installation targets attracted not only innovation but investment.
“Something as straightforward as Ofgem’s smart meter installation target has encouraged investment from sovereign wealth funds to pension funds into metering. It also serves as a blueprint for letting the private actor decide how to respond to regulation and, in doing so, encourage investment and innovation.”
It’s not sexy headlines but, in that scenario, it’s provided a framework for the private sector to invest in energy transition.
“You have tools in the arsenal, such as the CfDs, the RAB model, and the UKIB guarantee scheme, but there’s no replacement for PPP type procurement. There’s arguably still a void in the arsenal that needs to be addressed,” says the lawyer.
Many readers will be wondering whether a new Labour government will rekindle the PPP-movement that the New Labour administration delivered to huge effect from 1997. And recent developments mean private finance may need to be considered within social infrastructure once again.
The sudden closure of over 100 schools, due to the concerns surrounding reinforced autoclaved aerated concrete (RAAC), has sharpened the focus on the need for investment in school buildings. Critics have been quick to point to the Conservative-led coalition government’s decision to scrap the Building Schools for the Future (BSF) programme back in 2010, and subsequent refusals to spend the necessary money to replace aging classrooms.
However, experts warn that the threat caused by RAAC - used between the 1950s and early 1990s and in many cases now well beyond its original lifespan of 30-40 years - could expand beyond schools to a wide variety of other public buildings. Current chancellor Jeremy Hunt has pledged to find the cash to support the schools facing difficulties - but using private finance as an option to plug a gap that could rise into billions of pounds might seem attractive.
The problem for this government is that it has backed itself into a corner. Starmer may be less constrained.
“In the UK, the Conservative government made a mistake when the [then] chancellor cancelled PF2 and didn’t really give himself anywhere else to go,” says one major UK investor, referring to Philip Hammond’s decision at the Autumn Budget in 2018.
“Politically it would be bad for the Conservative government to change it but when you have change in government that could be when you can refresh things.
“Why can Scotland explore PPP with the A9? Why do the Welsh do it with MIM? But England can’t because one chancellor made a political decision so many years ago that they can’t unwind.”
The truth is that various forms of partnership have been bubbling away in the background for some time: Direct Procurement for Customers (DPC), the Mutual Investment Model (MIM), the Regulated Asset Base (RAB), and even Scotland’s Non-Profit Distributing (NPD) programme, have all been quietly bringing the public and private sectors together to deliver infrastructure upgrades with the private sector at risk over the past decade.
Urging the next Labour government to be bold on this front, the investor concludes:
“You can dress it up as many ways as you want but it’s the same thing. People shouldn’t try to fudge it; it’s a good thing. It would be refreshing to have a government optimistic and positive about using PPP as a procurement tool”