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At a recent roundtable we discussed the findings of our investigation into capital spending across the public sector. Rhiannon Williams and Wayne Butcher share the conclusions of the conversations.
Contents
“Crumbling buildings, creaking IT and a lack of equipment will continue to seriously hamper public service performance unless the government takes a new approach to capital spending”.
This is how the report we jointly published with the Institute for Government describes the impact of the UK’s historically low capital budgets in healthcare, education, and the prison service.
To find out how well it resonated with the sector we invited a range of stakeholders to discuss the findings. The conversation also gathered views on the success, or otherwise of PFI, and began to consider whether there may be new ways to introduce private finance into funding future social infrastructure projects.
The report: budget underspend and backlogs
Some of the evidence in the report is stark in terms of the consequences of decisions made and the way in which capital has been managed, particularly when weighed up against the backdrop of ‘what could have been,’ if it had been spent, and spent wisely.
This is illustrated by £6.7 billion, £3.4 billion, and £0.55 billion underspends in capital departmental expenditure limit (CDEL) allocations in the Department for Health and Social Care (DHSC), Department of Education (DfE), and Ministry of Justice (MoJ), respectively between 2010/11 to 2022/23. Unlike overspend, there’s no immediate consequence for capital budget underspend, the consequences only arise when there’s an overspend, but the impact will inevitably be felt by future governments and generations.
Four percent of the capital budget in 2023/24 for DHSC and DfE was used to fund revenue expenditure. Unfortunately, investing in backlog maintenance remains a non-priority for ministers, and so in all sectors the level is only rising.
The roundtable: key themes of the conversation
The pros and cons of PFI
A recurring theme was reflections on whether PFI has been successful or not and its relative strengths and weaknesses. There was consensus that while PFI had facilitated the rapid delivery of social infrastructure, its complexity and cost were significant drawbacks.
On balance, the group agreed that not all public-private partnerships (PPP) are inherently flawed. However, there’s a significant perception issue that needs to be addressed to regain public and investor trust.
Systemic constraints of using private finance
From the outset people raised considerations about the constraints that have existed since the start of PFI in particular balance sheet/ euro stat treatment and adherence to fiscal rules. The group debated whether certain PPP models, such as local improvement finance trust (LIFT) and Mutual Investment Model (MIM), could be deemed successful with most people being of the view that neither model had really delivered their true potential – recognising that while they may be suitable for smaller projects, this was probably not the case for larger hospital projects.
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Prioritising investment: points of agreement and disagreement
There was debate over whether the Government has focused on the right areas for investment. For example, over the last five years the focus has been on new hospital buildings, but some participants felt that investing in community and primary care facilities would have the greatest impact on performance and productivity – hence the feeling that the Government tends to commit resources to larger, flagship projects as opposed to ‘quicker wins’.
The roundtable also discussed what the new Government should do to facilitate private investment in infrastructure, particularly in social infrastructure and whether this should even be on the Government’s agenda. The conversation was lively and while there were points of agreement, there were plenty of areas where participants disagreed, some of which reflected their different experiences and role in infrastructure projects.
Points of agreement
All participants recognised the importance of infrastructure for the efficient delivery of public services.
Irrespective of people’s backgrounds there was a strong appetite for delivering infrastructure, with participants eager to push forward despite current challenges.
Over the last 10-years, some of the participants felt that the Treasury has played a more cautious role in infrastructure development, which has sometimes hindered progress on both publicly funded and private finance (before it was cancelled in 2018) projects.
Participants expressed that a shift in policy direction by HM Treasury would be beneficial in fostering a more conducive environment for streamlined infrastructure development.
All private sector stakeholders, whether banks, fund managers or construction firms, were unequivocal about the need for there to be a realistic pipeline.
Without this, companies will look to other sectors, or even other countries where there’s greater transparency about the size and scale of the opportunities.
The consensus was that infrastructure models should evolve in line with the complexity of the asset, moving away from a one-size-fits-all approach.
Any future models involving private finance need to be much simpler than PFI to avoid the pitfalls of excessive complexity and cost.
All participants recognised the need to improve capability on all sides, including both the public and private sectors, to effectively deliver infrastructure projects.
They also noted the significant loss of skillsets over the last 10-years, skills which had grown during the PFI years.
Points of disagreement
Participants had differing views on the success of PFI, both as a mechanism and in terms of the value delivered.
Some saw it as a necessary tool which has delivered a legacy of infrastructure projects, while others criticised its cost and complexity.
While the group agreed that perception is an issue, opinions varied on the extent to which PPP models are problematic. Some felt that some issues linked with PFI are in fact associated with general construction.
There was debate over what the data shows regarding outcomes, specifically whether PFI assets are better-maintained than non-PFI assets. This evolved into a discussion about whether whole-life costing over 30 or 40 years, requires the private sector to absorb risk that they can’t manage on a commercial basis.
Participants were divided on whether private finance offers better value than public money, with some members expressing reservations. This is likely to depend on the purpose for using private finance and whether it’s needed simply to fill the gap when CDEL is scarce, rather than securing additional risk transfer.
A challenging outlook for capital spend
Everyone acknowledged that challenging times are likely to continue, with the Chancellor's recent speech underscoring this point. There’s a sense that PPP-type models could be the way forward, but their presentation and implementation need to be carefully managed by the Treasury.
The focus now is on the Budget in October, to see what announcements the Chancellor might make that could influence future infrastructure planning and delivery.
