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'There is a need to find new and better ways of securing private sector funding for public sector projects to satisfy all stakeholder groups.'

 

Vice Admiral Sir Tim Laurence, Senior Advisor, PA Consulting Group

Exploring new ways of attracting private-sector funding of public-sector projects

 
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Private-sector funding will continue to be fundamental to many public-sector projects in the UK for the foreseeable future. However, the announcement by the UK government that it intends to reassess many existing private finance initiatives (PFI) indicates a degree of dissatisfaction with current contract models.

Simultaneously, private-sector funders find the lengthy and complex bidding and procurement processes currently in place a disincentive to investment in public-sector projects.

By overhauling its procurement processes and contract models, the UK public sector has an opportunity to increase the flow of private-sector investment to public projects, and to get better value from its procurement activity.

Simplify processes and speed up procurement

Under EU bidding rules, PFI-type procurement can be completed in less than six months. However, in the UK, the process takes much longer, increasing costs on both sides and acting as a disincentive to potential private-sector investors.  

To speed up procurement in the UK and make contracts more attractive to private-sector bidders, the public sector must address the following issues:  

  • capability – employing more experienced, senior procurement professionals would eliminate the bottlenecks that currently slow down the bid process

  • bureaucracy – simplifying approvals and governance would make the procurement process faster and more cost-effective for both parties

  • choice of procurement route – selecting the right route would ensure that relatively simple funding projects are not subject to more complex procedures  than necessary

  • pre-OJEU readiness – undertaking more preparation before OJEU (Official Journal of the European Union) bids begin

  • process design and management – realising opportunities to eliminate waste and deliver significant savings for the public sector

Develop a menu of contract models

Developing a range of new contract models could play an important role in attracting private-sector investment to public-sector initiatives and in helping the public sector improve overall affordability and value for money. Options include:

  • asset-backed vehicle – a modified version of PFI/PPP (Public Private Partnership) whereby the customer injects public-sector assets into a project to reduce the cost of the deal

  • balanced-risk partnership – an improved/de-risked PPP/PFI, whereby the public sector retains a greater degree of risk than normal in order to make the deal more attractive to private-sector investors

  • incremental partnerships – unbundled PPP/PFI whereby long-term partners deliver a range of services, some of which cannot be defined precisely at the outset of the contract

  • Government-Owned, Contractor-Operated (GOCO) – under this option, services are delivered by the private sector using assets that are owned by the public-sector customer

  • joint venture – alliance/risk-sharing partnership under which customer and supplier form a new legal entity able to raise funding on its own account

  • infrastructure bank – an option that allows for funds to be raised in the debt markets for investment in PFI-type projects and which may become available in the mid to longer term. 

The PA paper, ‘Action options for public sector clients today’, evaluates the effect of each of these models on flexibility, funding, risk transfer and contracting in more detail.

Next steps

The ideas in this article stem from a round table discussion hosted by RICS (Royal Institution of Chartered Surveyors), facilitated by PA Consulting (PA) and chaired by Vice Admiral Sir Tim Laurence. The discussion brought together participants from the public and private sectors, the legal and property professions, the Government Property Unit, RICS, the CBI (Confederation of British Industry) and PA. PA would like to thank all participants for their contributions.  

The round table discussions are part of an ongoing series to explore new approaches to private-sector funding of public-sector projects. If you would like to contribute to this debate, please contact us now.

To find out how PA can help your organisation maximise value from PFI/PPP initiatives, please contact us now.