PFI has been a key model for delivery of the UK’s critical infrastructure and wider supporting asset-base. Managing expiry and future provision is an important part of the public sector’s future strategic and financial planning for service delivery.
The roundtable highlighted a diversity of perspectives with attendees coming from central government, PFI funders, facilities management providers, technical advisers and legal professionals.
Successes of the PFI model
The conversation began by recapping successes of the PFI model, particularly in light of recent press coverage about the challenges faced by PFI schools and hospitals, such as large inflationary increases to maintenance costs and fire safety issues respectively.
In instances where PFIs have run more smoothly, for example, some attendees noted strong in-house expertise within local authorities as a key success factor.
PFI assets have also been a significant driver in improving service quality, including better classroom behaviour in school environments that have been enhanced, and which the PFI programme helped to create. (Conversely, when a PFI doesn't function properly, this can have a significant impact on the public, leading to negative media attention.)
Resetting relationships
The White Fraiser Report, published in July 2023, reviewed the status of behaviours, relationships and disputes across the PFI sector. It found that, while discourse suggests a large number of ongoing disputes across the operational PFI portfolio, in actuality less than 10% of PFIs at any one time are navigating through some form of formal dispute process.
Participants suggested that this perception might stem from the reporting and language used around PFIs. Examples that draw media attention are those where relationships are strained or have broken down. As projects approach their end, the expiry process can bring added complexities with potential disputes only heightening this.
White Fraiser suggested that a reset is required across many PFIs. This requires a clear strategy, including a review of the asset and, if applicable, a rectification plan alongside contract relief. It was expressed during the roundtable that tone and language could go a long way to achieving this reset. For example, PFI ‘expiry’ is viewed by many as a combative term that suggests relationships between the public and private sector parties must come to a hard stop at the end of the contract. Using a term such as PFI ‘transition’ may go some way to softening the tone and fostering a more collaborative approach to plan for contract end and post-expiry.
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What will private finance look like in future?
The conversation then moved towards understanding appetite for private finance as a source for delivering infrastructure in the future, and what this might look like.
An alternative model discussed was the mutual investment model (MIM), which has been used in Wales to bring additional investment into public infrastructure development. This model looks to enhance collaboration and improve relationships. For example, a local authority representative is required to sit on the board of the project company to provide input, alongside wider requirements such as the use of locally based contractors.
But while the MIM model is delivering investment in projects worth a capital value of £1.4 billion, this only relates to three schemes: highways, education and healthcare. It requires further testing before any conclusions can be made about applying it across the full range of sectors.
Given the significant infrastructure investment need in the UK, private sector finance will be critical for delivery. There's an inherent attractiveness of long-term infrastructure financing for organisations, such as pension funds, which desire a long term, stable income stream. Without a pipeline and clear model of delivery, there's a risk that investors will go elsewhere, to countries like Germany, the US or the UAE where established, supported programmes are in place.
Our expert looks at what private finance initiatives have taught us about delivering infrastructure projects – and what could be done better next time around.
PFIs: six lessons to help future infrastructure projects
The outlook: three takeaways for the future
Reflecting on this conversation, we present the following three key lessons for the future of private finance:
1 Strong relationships
Good communication, truly understanding the contract and a strong business case were viewed as key features of a successful PFI.
2 Resetting the mindset of key stakeholders
Terms of engagement help promote healthy, non-adversarial relationships, for example by using language such as ‘transition’ rather than ‘exit’ or ‘expiry’ to ensure that there's not a hard cut-off to relationships as contracts end. Both the public and private sector need to recognise when an issue is difficult but approach it with a collaborative mindset, similar to when their PFI projects were originally negotiated.
3 Creating favourable investment conditions
Establishing a firm pipeline of projects helps attract new investors to the UK market. This needs to be underpinned by robust delivery models, which are desired by institutional investors who seek long-term, stable income streams.
For more insight and guidance, get in touch with Rhiannon Williams or Wayne Butcher.
