Developing a new private finance model to ‘get Britain building again’

Whether it’s roads, railways, prisons, schools, hospitals or leisure centres, Britain is in desperate need of new public infrastructure.

Labour, during its 14 years in opposition, stressed the need to replace or modernise our ageing assets, and address acute housing shortages.

Now in office, it has committed to ‘get Britain building again’ and while its proposed planning reforms aims to drive housebuilding, developing new infrastructure may require harnessing private investment.

Even if the Treasury tweaks fiscal rules to unlock infrastructure investment, the challenging economic environment, coupled with a reluctance to increase borrowing or broadly-based personal taxes, strongly suggests the government must replicate some of the features of the private finance initiative (PFI) – a controversial model that nevertheless helped build much of today’s public infrastructure..

This subject formed the bulk of discussion during a roundtable hosted by Browne Jacobson in partnership with the CBI, chaired by the business organisation’s CEO Rain Newton-Smith, with two clear takeaways for policymakers.

Firstly, if businesses are to invest, they require a stable economic environment that prioritises long-term policy certainty, positive messaging and a dedicated skills strategy that will enable things to get built.

Secondly, we must learn from PFI’s mistakes to ensure the public purse receives better value and control while remaining attractive to the private sector. Alternative private finance models are emerging, offering potential to move forward and develop benefits for both the taxpayer and investor.

How PFI worked and why it was controversial

PFI – a form of public-private partnership (PPP) – was used to sign off more than 700 construction contracts between its introduction by Norman Lamont in 1992 and abolition by Philip Hammond in 2018.

It coincided with the largest sustained period of major public sector infrastructure investment in recent decades, financing swathes of new public infrastructure in transport, education, health, leisure, prisons, street lighting and environmental management.

Under PFI, a private sector partner would fund upfront costs of a project and then recoup this capital, along with ongoing finance and operational costs, through long-term repayments known as unitary charges from the procuring authority – typically a local authority, NHS trust or government department.

Contracts would typically run for at least 25 years. While the state didn’t pick up the initial tab, it was liable to make payments for several decades and many will run into the 2040s. A 2021 Public Accounts Committee report estimated the total ‘PFI bill’ to be £170bn against assets delivered with a value closer to £60bn.

Perceptions developed of poor value for the taxpayer and of windfalls for investors that refinanced debt at lower rates following the riskier construction phase.

Although many PFI projects delivered excellent infrastructure and associated services, the initiative’s reputation became tainted and it was used sparingly following the 2010 general election until its closure eight years later.

Does Labour need to revive PFI in some form?

Failure to replace PFI, however, has led to Britain falling behind other major economies in delivering infrastructure. UK overall investment averaged 19% of GDP in the 40 years to 2019, the lowest in the G7. The National Infrastructure Commission estimates both public and private sector infrastructure investment must increase by 30% to 50% over the next decade to respond to climate change and to bolster growth.

The assets we do build, meanwhile, are often more expensive and delayed than those of our major international competitors. Data from Britain Remade, for example, found the average cost-per-mile of the 10 most expensive rail projects was £397m in the UK, compared with £306m for Italy and £221m for France.

Partially as a result, our prisons are overcrowded, school and hospital estates are ageing, and rail networks at capacity.

While the revival of a PFI-like arrangement may be politically toxic, Labour does appear open to some form of private involvement in the private sector. Health secretary Wes Streeting has invited independent healthcare providers to help cut NHS waiting lists and reports suggest the government may ask investors to bankroll the £9bn Lower Thames Crossing project.

Potentially more enticing PPP alternatives are emerging. Since the late 2000s, public authorities in Scotland have deployed the non-profit distributing model. Its three broad principles are enhanced stakeholder involvement in project management, no equity dividends and capped private sector returns.

The Welsh Government uses a mutual investment model that works very similarly to PFI but the public sector partner is a shareholder, with greater input into the contract terms and receiving ‘cashback’ on any profits made.

With both models still attracting criticism for lack of transparency and increased public sector risk, the Future Governance Forum (FGF) has taken lessons to propose the infrastructure investment partnership (IIP) in a report published in September.

The IIP model is billed as a new approach to PPPs by placing greater emphasis on community benefits in any project, cultivating a culture of long-term collaboration and giving local areas more control over their infrastructure.

It contains a novel ‘Regeneration IIP’ option in which a core piece of new infrastructure becomes an anchor investment for the regeneration of the wider neighbourhood in which it sits.

FGF believes this would ensure more projects are built on time and on budget, assets are properly maintained post-construction, and contributes to wider economic regeneration and public policy objectives. The lure for private sector partners stems from the commercial potential in having access to other unused land on site.

Inevitably, this and any other forthcoming PPP models will require greater scrutiny but the government must adopt a pragmatic approach if it’s serious about getting Britain building again.

This article was originally published in Estates Gazette (EG) magazine on 17 October 2024.

About the Author

Craig Elder is a Partner at Browne Jacobson, a leading UK and Ireland law firm working to make a difference across business and society. Craig advises government bodies and government clients on projects, complex procurements and high-value contracts. He was also recently named as “public sector person of the year” for delivering innovative partnering arrangements with our local authority clients.

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