With the Government committing over £800 billion to hundreds more infrastructure projects, Wayne Butcher looks at what private finance initiatives have taught us about delivering infrastructure projects – and what could be done better next time around.
Contents
Between 1995 to 2018, 683 new infrastructure projects in the UK with a capital value of £52.2 billion reached financial close using the private finance initiative (PFI); most of these were before 2010. These projects included schools, hospitals, roads, and waste services, and typically replaced old facilities designed for a different era.
Inevitably, the process of developing and implementing so many projects has generated a massive amount of insight about delivering infrastructure projects. PFI was the Government’s last major programme for infrastructure projects. Now, in 2023, the Government Major Projects Portfolio (GMPP) has 244 projects with a whole-life cost of £805 billion [PDF] – with many more hoping to make the list.
As these projects progress, we consider some of the key lessons from PFI.
Infrastructure projects are often large and always complex
Infrastructure projects are often large and always complex, and PFI is no exception. They involve complex, global supply chains. PFI also brought together organisations that hadn't previously worked together: construction firms (and their supply chains), hard and soft facilities management companies, equipment providers, equity investors, and debt and bond funders. PFI also has complex contractual and commercial terms which evolve over the term of the project.
Large isn't necessarily a problem but complexity can be. All parties involved should think carefully about the teams they put in to run and manage these projects at every stage of the project’s life, and ensure the right skills and experience are in place to manage different issues as they arise.
Long-term relationships are difficult and take work
Like any partnership it takes work to maintain the relationship long-term. During the setup of a PFI project, the public sector authority and private sector were often bound together by a common desire to get the project to financial close, but once this had been achieved, that common purpose was less obvious. Key people on both sides moved off the project and new people, often with less experience, were brought in. In many cases, the companies involved also changed, with new suppliers, investors, and funders – and new motives.
The relationship between the public and private counterparties is likely to be key to the success of PFI projects as recognised by White Frasier 2, who noted the need for goodwill and flexibility by all parties.
Where contracts are long term, both parties need to explore ways in which the relationship can be strengthened. This means introducing any new people, calling out poor behaviours, and, although the financial relationship is important, ensuring there's a focus on non-financial matters in meetings.
Consider having a longer strategy session each year as a reset, to establish an agreed understanding about where the project is, what could be improved and what both parties need to do over the next twelve months. It’s important to be clear on the nature of the relationship, whether it’s contractual, a partnership or joint venture.
Infrastructure projects can be built on time and to budget
This happened on most PFI projects because the private sector didn't receive the unitary charge until the facility was fully operational. Prior to PFI, this was unusual and since it was abandoned, recent economic infrastructure projects have often faced cost overruns. Whether it’s possible to secure fixed prices on complex projects seems challenging, but the principle of guaranteed maximum price with a pain and gain share, is one of the ways in which this is being tested in NHS projects using P23.
Consider using the same disciplines as PFI: when a lot of work was completed before any contract was signed or money passed hands. The public sector should define the requirements up front and the design solution should be worked up to a level of detail that all parties can have reasonable confidence in the costing.
Whole-life cost of the asset taken into account
PFI took into account the whole-life cost of the asset rather than taking a short-term approach focusing solely on the upfront capital costs. As a result, the unitary charge covers all costs for the full term of the contract. We'll only know if the life cycle investment has happened when the public sector either uses its right to audit or undertakes a survey as part of expiry planning.
At the moment, many PFI assets appear to be in good condition, which compares favourably with the public sector’s non-PFI assets, where the Capital Departmental Expenditure Limits (CDEL) aren't enough to cover the whole-life costs of the asset– as demonstrated by the growing level of backlog maintenance in the NHS (£11.6 billion in 2023, according to Estates Returns Information Collection 2021/22).
PFI has shone a light on the need to avoid short-termism and really understand the long-term cost of assets and the year-on-year implications for CDEL.
The public sector should reflect the whole-life cost of any major investment in the outline business case (OBC) and full business case (FBC). A realistic estimate of this should be taken into account in any options appraisal as there may be significant differences between options. This should be tested in the procurement and assured by technical experts.
PFI seen as rigid and lacking flexibility
Detailed and specific contracts have become a problem for authorities when circumstances have changed and they want to change the building or services accordingly. There are examples of the private sector charging the public sector exorbitant rates for making these changes, and also of the public sector not giving appropriate access. All infrastructure projects need to be designed in a way that changes can be made more flexibly.
Authorities should factor in flexibility to the design of the building from the outset. With the right relationship, small variations should be possible with both parties working together. Larger variations will always require more planning and collaboration.
Monitoring and reporting requirements poorly managed
The monitoring and reporting requirements have often been poorly managed by both the public and private sector. The public sector has often under-resourced this area, and those responsible for it often don’t have the right skills, whether contract management experience or knowledge of the contract. And while this was always seen as a core skill in the private sector, that doesn’t appear to have been the case with PFI. It’s possible that there's been a loss of corporate memory and the complexity of the contract makes it difficult for new people to get to grips with it easily, or that the private sector doesn’t want to be transparent about its performance.
Where contracts are complex, it would be beneficial to develop an easy-to-read and practical playbook that can be used by the authority. It could even be used by both parties. Contract management systems and processes should be set up and these need to be managed and monitored by someone of appropriate seniority for the size and scale of the contract.
A roadmap for future infrastructure projects
PFI delivered a huge number of important economic and social infrastructure projects and, while it doesn't have a good reputation, there are undoubtedly lessons that can and should be learnt from them:
The skills, experience, and type of people that need to be involved at each stage of the project
Review the relationship between parties regularly and if consider a ‘reset’
Define the project requirements early in the project and discuss how flexibility will be managed as the project progresses
Include all costs during the life of the project and not just the up-front capital costs
Develop systems and tools to help manage and monitor long-term projects
For more insight and guidance, get in touch with Wayne Butcher.
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