Despite the years of scandal and failure surrounding the private finance initiative (PFI) procurement model, the Treasury still sees no alternative to bringing in private investment to pay for public infrastructure.
To help avoid some of the pitfalls of the past, the government spending watchdog has put together a greatest hits album of lessons from its previous investigations.
The National Audit Office (NAO) notes that there is a range of private financing models aside from PFI, including institutional investors providing debt and equity or related financial instruments, or the contracts for difference method used to fund Hinkley Point C.
The NAO report, Lessons for public infrastructure using private finance, sets out a series of insights drawn from its back catalogue of reports on the various models of private financing for public infrastructure projects. The report aims to support public bodies as they consider how to finance new public infrastructure.
In order to create the right conditions to support investor and public confidence, public bodies need clear objectives and a credible and consistent forward pipeline for investment, it says.
The NAO report highlights the importance of establishing a consistent, credible and affordable National Infrastructure and Construction Pipeline. The report identifies opportunities to support investor confidence in future investment by improving the level of detail and reliability of information in the pipeline, including details and value of upcoming investment opportunities.
The government also needs to ensure it has the information and processes in place to make the right decisions at policy and project levels. The NAO report recommends that departments develop robust business cases with clear assessments of the benefits and risks of using private finance, and mechanisms to balance cost considerations with the need for appropriate returns for investors.
It says that the government should consider how the risks and gains of investments can be shared equitably with private investors. For example, a previous NAO report on Hinkley Point C highlighted that the contract for difference used included a mechanism for sharing equity gains. If the rate of return on investment exceeded 11.4%, the company (the special purpose vehicle set up to deliver the project) will receive 70% of any gain above this level, and if rates exceed 13.5%, the company will receive 40% of any gain above that level.
The NAO also says that not all risk necessarily should be transferred to the private sector because the cost of inappropriate risk transfer can be very high.
There is also a repeat of previous warnings against using private finance as a way to cook the books, to get ‘off balance sheet’ capital investment but endure decades of ruinous repayments on revenue accounts. Then there is the eventual costs of maintaining or upgrading assets when they are handed back by the private sector. If costs are not accounted for properly, taxpayers will be exposed to the risks of higher public expenditure over the long term, the NAO says.
The NAO highlights the need for a whole life approach to using private finance for investments in public infrastructure including, planning for decommissioning an asset, extending a contract, re-procuring or taking over the operations and maintenance of an asset after contract expiry.
Gareth Davies, head of the NAO, said: “The government has set out its ambitions for growth over the next decade. Private finance can contribute to that growth through investment, provided that important lessons are applied from different models of financing infrastructure in the UK and internationally.
“Government should take a transparent approach to assessing the role of private finance in major investments, showing how value for money for taxpayers will be achieved alongside appropriate returns for investors.”
Sir Geoffrey Clifton-Brown MP, chair of the House of Commons public accounts committee, said: “If the government intends to rely on private financing for large infrastructure projects, it must heed the lessons from previous experience first. Government needs to be clear with taxpayers about the rationale for private financing by properly evaluating the benefits and costs against publicly funded projects, and provide a credible pipeline of projects to encourage investment.
“It would be wrong to assume that government can pass over all risks to the private sector. As we have seen previously, without the right in-house skills and the data to monitor and oversee these contracts, public bodies can be left to foot large bills when assets return to the public sector poorly maintained.”
