Given that the roundtable event was taking place while Interserve’s share price was falling by over 50%, the session inevitably started with a discussion over the strength of the contracting market in the UK.
As one participant put it, “Regardless of what comes after PFI, the government is going to be exposed to contractor risk.”
Another agreed: “We are now seeing a situation where companies can go very quickly from being well-performing entities to verging on bankruptcy. It is difficult to talk about any company with any certainty.”
The collapse of Carillion in January still casts a long shadow over the industry, almost 12 months later, and is considered to be a contributing factor in Chancellor Philip Hammond’s decision to abolish PFI and PF2 in his Budget.
So the fact that Interserve – not to mention Kier – remains in a precarious position adds another layer of complexity to the question of what might come next after PF2, and how willing any politician might be to throw their full weight behind it. For all the industry’s shouting around the fact that Carillion’s collapse has not burdened the taxpayer on its PFI deals, the political rhetoric has been that the company was simply making large profits out of public services.
Turning that message around will be a tough job, but those in the room agreed that one of the key elements here will be down to the focus on what constitutes ‘best value’ in any new approach to privately financed infrastructure projects. “The lowest price bid always wins, which is a problem,” said one. “That is part of the reason why contractors have struggled.”
So should the UK government take a leaf out of the devolved administrations, where Scotland’s Hub non-profit distributing (NPD approach and the Welsh mutual investment model (MIM) have put greater emphasis on social and local benefits?
While there was enthusiasm in the room for the principle of this, one participant warned: “It would be interesting to see how you would work through the collapse of a contractor on a project like MIM or NPD.”
Another area to consider for those working on any new model of PPP is the amount of risk being transferred to the private sector. “If the government transfers all the risk to the private sector and then turns its back on the project, there will be problems,” said one. “If the government genuinely thinks about entering into a proper partnership, there is potentially a better outcome.”
Most agreed that there is growing acceptance of this from government. Indeed, it could be another factor in PF2’s downfall, as ministers began to realise that contractors were unwilling to take the levels of risk that were expected under a PF2 regime.
When it comes to getting the message out about the benefits of private finance, those in the room agreed that there needs to be greater engagement from the public sector, with organisations such as the Infrastructure & Projects Authority needing to listen to the market so that it can develop the kinds of responses that will not only be politically acceptable, but also successful in the market. Being able to explain to politicians and others in the public sector why partnerships with the private sector can be beneficial was also highlighted as an important area that needs to be developed.
One solution suggested by some in the room was to move to a slightly different approach, focusing on the local level instead of the central government layer. By doing this, bespoke approaches could be developed that do not get tarred with the same brush as any projects that have not performed well, as happened with PFI. It would also give the private sector an opportunity to build strong local relationships that can thereby encourage positive reports of the work being carried out.
As negative headlines continue to swirl relating to Crossrail, some in the room pointed out that this highlights the fact that any large, complex project is likely to be subject to delays and cost overruns – regardless of whether it is privately financed or not.
Perhaps, then, the message to government needs to be that, whatever projects it wants to deliver, there will be difficulties and problems along the way. Using the private finance community to help deliver those schemes should not be out of the question, provided the public sector is willing to accept the same risks around delays as it is faced with on publicly procured deals.
As one participant pointed out: “People forget that, prior to PFI, public procurement was poor.”