How can government turn private capital into public value?

For years, debates about privatisation and Private Finance Initiatives (PFIs) were shaped by concerns that some arrangements delivered poor value for money, and in certain cases rewarded investors at the expense of citizens. High-profile examples involving hospitals, schools, London Underground upgrades, and road-widening schemes helped create the conditions for the 2018 moratorium on PFIs, once the UK's principal model of Public-Private Partnership (PPP).

Yet private capital never stopped flowing into public infrastructure. Investors have committed billions via other mechanisms such as government guarantees (where the state underwrites private investment, typically in areas like housing, transport, and energy infrastructure) revenue support models like the CfD (Contract for Difference) in energy, and regulated asset base frameworks (where the asset owner recovers an agreed return on their investment through regulated charges to customers, most commonly in water, energy networks and nuclear). While these models differ in design, they typically incorporate regulatory oversight and defined risk-sharing arrangements intended to protect value for taxpayers and consumers.

There is clearly still an appetite in government for further partnerships. In recent years ministers have actively courted institutional investors, securing a £50 billion commitment from pension funds to invest in infrastructure in the Mansion House Accord, alongside the estimated £100 billion unlocked by the 2017 EU Solvency II regulations, which offer insurance firms strong incentives to direct capital to eligible infrastructure projects.

The total balance sheet capacity for the country’s four most prominent public financial institutions, which provide guarantees, loans, and equity matching to support private investment – the British Business Bank, UK Export Finance, the National Wealth Fund, and the National Housing Bank – has meanwhile grown to £200 billion.

Altogether, of the £725 billion of investment that the UK Infrastructure Pipeline says is required over the next decade, £466 billion is slated to come from blended public and private capital.

These cover much-needed improvements in areas from housing, road, and rail to the digital and energy transitions, and the expansion of defence capabilities. It doesn’t cover the potential to invest in programmes to prevent crime and illness – prevention being more cost-effective in the long run than cure – which could likewise support long-term policy goals if they weren’t persistently crowded out by urgent spending needs.

The UK has deep enough wells of private capital to support all these ambitions, as evidenced by the flows of money that occur when the terms are right. Yet availability of capital has never really been the problem. Too often, investments have flowed into poorly structured deals that undermine confidence in private capital itself.

We encounter this tension regularly in conversations across government and the investment community. We’ve heard Treasury officials say that, effectively, it is better to go to the gilt market than seek direct project financing. We’ve heard senior civil servants tell us that they want to access private capital, but their hands are tied by the fiscal rules imposed by the Treasury. And private investors, on being offered tougher terms by departments, tell us that those terms just aren’t viable.

The result is a wasted opportunity, because ruling out private capital entirely can mean overlooking options that would deliver a range of advantages: greater value, increased speed and efficiency, and better-managed risk.

To deliver the generational returns and economic growth needed during this decisive decade, the UK therefore needs to improve the performance of investment in infrastructure. This will require a much more strategic, pragmatic view of precisely when, why, and how private capital should be used in pursuit of public ends, alongside the systematic development of public sector expertise in negotiating and delivering effective partnerships.

1. Prioritise private capital where it can make the biggest difference

Any decision to seek private capital must begin with the fact that non-government money is almost always more expensive than government money.

This means it is only worth considering when the return on investment for the public is high enough to justify the cost, and when the cost is too high for the government purse alone. In practice, this makes it ideal for major capital investments outside of day-to-day spending.

Passing largely unnoticed beneath Londoners’ feet, the 25km, £5 billion Thames Tideway is a case in point. The UK’s largest ever water infrastructure project and the most substantial modernisation in the history of the capital’s sewerage system, it has reduced direct release of untreated sewage into the Thames by 95 percent since going operational in 2025.

The Tideway was built – ahead of time and within its original cost parameters – by a private consortium, Bazalgette Tunnel Ltd, with a hefty public support package. Few in the industry believe it could have happened any other way, with the cost too high for the state and the risk too high for private investors without government support. Yet it still represents excellent value for money when viewed over decades.

In contrast, it is rarely good value for money to use private capital to pay for essential services or routine maintenance, which are most cost-effectively and sustainably funded from taxation.

2. Understand what investors need for commercial viability

A successful partnership clearly has to work for both sides. When deciding where to focus efforts to attract private capital, senior civil servants and ministers therefore need to ask whether they can offer an attractive enough deal to private investors and, if so, how.

It is not always a question of the government offering a stronger upside or simply assuming more of the risk. Above all, infrastructure investors want a stable, predictable return that beats the risk-free rate they could get from buying bonds. Many argue that they cannot get this when there is so much political churn: how can they commit to a 25-year project when a new government might cancel after two or three years?

For example, PA experts supported the first use of Contracts for Difference (CfDs) in UK renewables and nuclear, as well as the first life extension CfD for nuclear. CfDs, which mitigate market risks by guaranteeing generators a strike price (with government topping up revenues when wholesale prices fall below it and recouping excess revenues when prices rise above it), have since proved popular in the market, attracting tens of billions of pounds of wind and solar investment.

The strike price for many energy CfDs is high relative to historic natural gas prices, but this is less politically contentious than it might otherwise be, because most parties and the public at large accept that energy security comes at a premium.

Sectors that don’t charge users, like health in the UK, require different structures to access private capital. Indeed, neighbourhood health and public sector decarbonisation were notably the only sectors still given permission to use PPPs in the 2025 Budget. But the public is much less accepting of private involvement in health, creating greater political risk for investors and policymakers.

Addressing that risk requires more than contractual certainty. Investors need confidence that governments will stand by long-term agreements in the face of external events. CfDs have proven popular precisely because they cover investors against risks from wars, fuel price swings, or market oversupply (curtailment). Similar approaches may offer lessons for sectors seeking to attract long-term private capital.

Awareness of all these risks – how they might deter investors, what guarantees would be necessary to make them attractive, and whether the government is willing and able to make those guarantees – needs to be factored into discussions of where to prioritise public-private financing deals.

3. Match the model to the asset

Once public servants have identified projects that would be suitable both for government and for investors, they still have to produce an agreement that will deliver sufficient value for everyone involved.

One size does not fit all. Blended public-private structures, availability payments, regulated asset base models, CfDs, government guarantees, and mutual investment models are different tools. They are not interchangeable, and the wrong model for the asset is likely to lead to the wrong outcomes.

To help select the appropriate model, there should be a clearer framework across the public sector for assessing model-asset fit. Questions to ask include: What are the expected benefits of this investment? What kind of value is it creating – is the benefit primarily public, or is a significant share captured by private organisations? What are the underpinning economics of the asset – is the taxpayer ultimately paying, or the end user? What kind of risks are there, and where do these fall?

If the framework can be codified, with clear parameters so that not all private capital is considered novel, contentious, or repercussive (a specific Treasury criterion) then departments will more easily know what they can and cannot do. This process could then be applied across sectors and regions in the way that the Green Book is applied for business cases more generally.

4. Build the skills to structure and manage deals better

Once the right model is selected, the deal still needs to be structured and managed in the right way. A poorly structured deal can actively disincentivise the behaviours that the state requires from its private partners. The criticism levelled at water companies – that long-term underinvestment has led to increased failings – and discussions about renationalisation, can only be properly understood in the context of conflicting regulatory drivers.

Over the past decade, regulators mandated that bills were kept low while increasing environmental performance targets. This ultimately led to poor outcomes for customers, the environment and for investors. Outcomes are shaped by the regulatory and licensing frameworks within which firms operate. When those frameworks do not align investor returns with long-term asset performance and service outcomes, the resulting incentives can contribute to unintended consequences.

The state is a founding equity holder in the private consortia building the infrastructure, which is contractually obligated to deliver community benefits, with clear penalties for non-delivery. NPDs also cap investor returns, which are not distributed via traditional dividends, reducing public fears of private sector exploitation while giving investors the reliability they seek.

How deals such as these are performance-managed can be as important as negotiating their precise terms, requiring the right metrics and careful tracking. Yet neither effective deal-making nor effective performance management can occur without the public sector having the commercial skills and structures to actively support them.

There is some way to go. Investors often privately complain that government lacks an investment mindset. Three-year spending reviews, quick ministerial turnarounds, and individual departmental budgets make it difficult to structure investments over the long term. At the same time, conversations between investors and officials often go nowhere because the parties don’t speak the same language and lack experience in what the other side needs. Investors, unsurprisingly, tend to speak of risks, return and value in financial terms, while a typical public sector cost-benefit analysis looks at budgets and policy outcomes.

Dealmaking will get easier when there is a deeper well of knowledge and experience in the public sector around complex deal structures and commercial negotiation, the workings of the gilt market, and how to identify and understand cost, risk, and benefits from an investor perspective. Expertise in applying the Green Book and Balance Sheet Framework, meanwhile, will reduce the time wasted on dead ends.

The best place to start to build this commercial capability is with what the public sector already has. Currently expertise is spread across the Treasury; the National Infrastructure and Service Transformation Authority (NISTA); the Cabinet Office; public financial institutions like the National Wealth Fund; the various departments and arm’s-length bodies that handle PPPs, CfDs, and government guarantees in their relevant areas; and specialist organisations such as the Office for the Impact Economy.

Connecting and integrating them would make it easier for officials to share lessons from across central and local government, and between departments. To an extent, this was the intention behind the Office for Investment, but expertise still remains too decentralised. Going further would make it easier and quicker to select, structure, and negotiate private capital deals, because departments wouldn’t have to rely on building sophisticated capabilities themselves, from scratch.

At the same time, it’s important that frameworks don’t become blueprints, and that negotiating deals doesn’t become solely the responsibility of a single centralised body. These can and should support individual departments, but what works for justice won't work for water, and what works for rail won't work for energy. Sector expertise is also vital for ensuring the right level of public control and oversight, which means the relevant department must still take the lead.

Similarly, local knowledge has proven key for innovative finance structures like Social Outcomes Partnerships, which is going to be used by the central Better Futures Fund to match private capital to tackle social outcomes on the ground, in a way that suits the needs of a particular place.

Taking the lead again

The UK was once a pioneer in the use of private capital for public investment. As a pioneer, it made mistakes that others around the world have learned from, but the lesson the UK itself took from those mistakes was the wrong one, reducing rather than refining its access to finance during a decisive decade when transformational projects cry out for capital.

Today, despite its successful application of instruments such as CfDs in energy, Britain has been far more cautious about applying similarly innovative risk-sharing mechanisms in other sectors. Its capabilities in PPP and taxpayer-backed models have atrophied, not only in negotiating deals but also in performance-managing private capital instruments, leading to poorer outcomes that further deter their use.

Equipped with the right commercial skills and delivery models, government can draw on private sector capital and expertise where it offers genuine advantages. In the right circumstances, this can help deliver infrastructure projects faster, more efficiently, and with better-managed risk. In doing so, it can restore confidence among both government and investors, creating the foundations for more effective future partnerships.