Despite past failures, well-designed new PPP models could deliver high-quality infrastructure without squeezing the public purse, argues Anthony Walker.
The private finance initiative (PFI), once heralded as a solution to the UK’s infrastructure problems, has come under intense scrutiny. PFIs, and public-private partnerships (PPPs) more broadly, are often criticised for inefficiencies and high costs, yet the idea of combining public needs with private capital remains compelling. The crucial question for construction professionals now is: has the PFI model truly failed, or is it simply in need of reinvention?
PPPs: a brief history
The concept of PPPs took hold in the UK in the 1990s as the government sought new ways to fund the country’s growing infrastructure needs without overburdening the public purse.
The PFI model, in particular, allowed the public sector to secure private capital for infrastructure projects, such as hospitals, schools and roads, while transferring significant risk to private entities.
The private sector took on the design, construction, financing and operational risks in exchange for long-term returns, while the public sector could deliver essential services without upfront financial strain.
More than 700 PFI contracts have been signed since its inception, generating assets that were crucial for the UK’s social infrastructure.
The model promised to revolutionise public procurement, offering a way to deliver projects without immediate impact on public sector borrowing. However, as the years passed, the reality of PFI became more complex, with both staunch defenders and vehement critics emerging.
Despite these issues, it’s important not to overlook the positive contributions of PFIs in the UK. According to research from the Infrastructure and Projects Authority (IPA), most PFI projects have performed adequately when it comes to asset management and lifecycle funding.
The rise and fall of PFIs
Successes
Rapid infrastructure delivery: PFI projects were more likely to be completed on time and within budget compared to traditional procurement methods. The National Audit Office reported in 2009 that 69% of PFI projects were delivered on time, compared to just 63% of non-PFI projects.
Risk transfer: the private sector absorbed significant operational risks, including regulatory changes like new fire safety standards. This transfer of risk was estimated to save the public sector billions over the lifetime of PFI contracts.
Protected maintenance: ring-fenced lifecycle funding ensured assets remained well-maintained, shielding them from short-term budget pressures. This led to higher overall asset quality and longevity, with some PFI hospitals reporting better maintenance standards than their publicly procured counterparts.
Challenges and failures
Complexity and inflexibility: PFI contracts were often labyrinthine, making them difficult to manage and adapt over time. Some contracts ran to thousands of pages, requiring specialist teams just to interpret and enforce them.
Cost: the long-term cost to the public purse often exceeded initial estimates, leading to accusations of poor value for money. By 2018, the year PFI contracts were discontinued for new infrastructure projects, the UK government estimated that existing PFI contracts would cost taxpayers £199 billion by the 2040s, far exceeding initial projections.
Adversarial relationships: As budgets tightened, some public sector bodies resorted to aggressive contract enforcement, eroding trust and partnership ethos. This led to a rise in disputes, with some high-profile cases ending up in court, further damaging the reputation of PPPs.
Learning from the past
Calls for the complete abandonment of PFIs are understandable, but they ignore the model’s core strengths. The reasons PFIs were introduced in the first place – fiscal pressures, a need for rapid infrastructure development and risk transfer – remain relevant today.
Rather than scrapping the model, reform is the way forward. This could include:
- Simplification and flexibility: future PPPs need simpler, more flexible contracts. The rigidity of early PFI agreements made it difficult for projects to evolve over time. Any new model should incorporate mechanisms that allow for renegotiation without punitive costs, enabling projects to adapt to new regulations, innovations or changes in public demand.
- Improved public sector capacity: one of the primary reasons for adversarial relationships has been the public sector’s lack of commercial skills. Too often, local authorities and government departments lack the expertise to oversee complex contracts, leading to disputes and inefficient project management. Investing in public sector contract management capacity, as recommended by multiple government reviews, could alleviate these problems.
- Rebalancing risk: PFIs succeeded in transferring construction and operational risk to the private sector, but sometimes at an unsustainable cost. A revised PPP model should ensure that risks are fairly distributed, with clear contingencies for managing unforeseen events like regulatory changes or shifts in public policy.
Beyond PFI: alternative PPP models
Given the criticisms of PFI, alternative models have emerged that could retain the benefits of private sector involvement while addressing the shortcomings of PFI. Some of these include:
- Mutual investment model (MIM). Used in Wales, this allows the public sector to retain a stake in the project company, aligning incentives more closely. The Welsh government has committed to using MIM to deliver £1bn of infrastructure projects. To date, it has only been used on a small number of contracts.
- Infrastructure and investment partnerships (IIPs). Shift more risk to the private sector. They set annual payment levels before construction, protecting taxpayers from cost overruns. IIPs also aim to improve public sector management and use infrastructure projects as catalysts for wider area regeneration. This approach aligns with the role of NHS providers as ‘anchor institutions’ and supports broader social and economic development in collaboration with local authorities.
- Regulated asset base (RAB) model. This approach guarantees investors a return on investment for the lifetime of an infrastructure asset. The UK has used RAB extensively in privatised network utilities and recently extended it to nuclear energy generation.
- Direct procurement for customers (DPC) model. Introduced by Ofwat for UK water projects with total lifetime expenditure of at least £200m. Water companies competitively tender for a third party to design, build, finance, operate and maintain assets. DPC aims to achieve cost savings, improve project delivery and attract new private capital, while requiring careful risk management and contract structuring.
Labour’s new PPP model
The Labour government has indicated it wants to see future PPP models that differ from the profit-driven approach of PFIs – with greater transparency, minimising private sector profits, and placing more control in the hands of the public sector.
A key feature may be the introduction of ‘value-for-public-money’ clauses, where any private involvement must demonstrably benefit public service delivery, rather than merely achieve financial returns.
This approach aims to address many of the criticisms levelled at traditional PFI while retaining the benefits of private sector expertise and efficiency. However, critics argue that it may struggle to attract sufficient private investment without the promise of substantial returns.
Why this matters: implications for construction
The resurgence of PPPs could have a range of implications for construction professionals, including:
- Training and education. Construction professionals could seek training in PPP best practices, contract management and collaborative working methods.
- Project delivery. construction firms may need to adapt their processes to meet the requirements of new PPP structures, focusing on long-term performance and flexibility. This could involve changes to project management methodologies, supply chain management and performance measurement.
- Career opportunities. Expertise in PPP project management and delivery could become a valuable skillset for construction professionals. Construction professionals with these skills may find new career paths opening up in both the public and private sectors.
- Long-term asset management. The industry may see a shift towards more involvement in the operational phase of assets, requiring new skills in facilities management and lifecycle planning. This could create new revenue streams for construction professionals who adapt their business models.
In addition, well-designed PPP models could mean faster delivery of high-quality infrastructure for taxpayers without placing unsustainable burdens on public finances. However, this will require robust scrutiny and transparency to ensure value for money.
The future of public-private partnerships should not be viewed through the lens of past failures. While PFIs were far from perfect, they did bring about much-needed infrastructure improvements. By learning from these experiences, the next generation of PPPs can be structured to deliver more value, flexibility and collaboration.
Anthony Walker FRICS MIFireE is a chartered surveyor specialising in building surveying, fire safety and asset management. He is also a director at Sircle, a multi-disciplinary surveying consultancy.
I’m retired now but was part of a team that successfully negotiated and delivered three PFI housing schemes. I agree with you that the model of Private/Public schemes should not be abandoned and learning experience could help develop the model. None of the schemes were without challenges.
The procurement process was certainly lengthy and the room full of contracts on signing day bore witness to the scale of the document negotiation with the legal representation of the parties.
One drawback for relationships is the time frames for procurement and delivery. We had government ministerial changes, politically driven new value for money auditing, key individuals leaving and new party representation without the history or partnership ethos and delivery challenging legislation changes.
A better risk share arrangement would certainly deliver better value as would standardised contracts. Payment for the procurement process would enable parties to invest the time and resources necessary to speed up the process. A single project bonding and insurance and warranty arrangement for all parties would save costs.
I remain of the view that PPP could form a part of the government’s delivery of the housing targets with carefully crafted and balanced risks and rewards drawing on private contractors’ expertise.