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Government must get serious about good value PFI alternatives

"The public sector needs to get serious about understanding how to get the best value from private investors."



Sir Tim Laurence

The Guardian: Public Leaders Network

1 December 2011


As George Osborne seeks more private finance for UK infrastructure, PA's Sir Tim Laurence asks which are the best deals for public sector customers. 

The chancellor is hoping to persuade sovereign wealth funds and British pension funds to put private finance into his public infrastructure plan.

But will the public sector want the money? While the private finance initiative (PFI) projects of the last two decades have delivered some excellent public facilities, many now regard the PFI model as inappropriate. Is there a viable model to replace it?

The key lies in understanding the flaws of PFI. First, downstream payments for these elephantine hire purchase schemes are proving unaffordable. Demand for public services fluctuates over time and while PFI contracts can usually cope with increased demand (at extra cost) few will reduce their charges as demand falls or in exchange for less ritzy services as departmental budgets tighten.

PFIs were supposed to be quicker to procure, but the opposite has generally proved to be the case. Analysis by the Royal Institution of Chartered Surveyors indicates that PFI procurement times in UK averaged 36 months, double the time taken in the US, Canada and Australia.

Finally, PFIs became in effect a financial package or commodity. Investors traded them on the markets, often taking considerable profits from which, until recently, the public-sector customer took no share. So PFI schemes are now considered to be unaffordable, inflexible and slow to procure. The perception is that some parts of the private sector have taken substantial profits, whilst the public sector has received bad value for money. How might we avoid these mistakes if new funding comes on tap?

A more flexible range of public private partnership models, most of which have been around in one form or other for some time could be the answer. They include:

• Asset backed vehicles where assets such as redundant land or buildings are injected by the customer into a deal to offset the cost of constructing new facilities. The value of the assets passed to the supplier is deducted from the construction costs thus reducing the service charges payable. ABVs are already well used by local authorities.

• Balanced risk partnerships where the customer retains a greater degree of risk than is normally transferred (at considerable cost) to the private sector supplier. [Risks supposedly transferred across very often end up back with the customer anyway, so why pay extra for them?] This type of model could be used, for example, to develop the advanced telehealth systems the UK needs to cope with its ageing population and to meet the challenge of NHS efficiency targets.

• Incremental partnerships where a customer selects one or a small number of long-term partners to deliver a range of facilities or services which cannot be defined or priced precisely at the outset. This maximises flexibility within a stable, long-term partnership.

• Government-owned, contractor-operated partnerships where services are delivered by the private sector using public-sector assets. This is in effect a strategic outsourcing arrangement, but it is also possible the supplier might build facilities and lease them back or transfer them over time to the customer. This could be an appropriate vehicle for attracting private-sector investment in the introduction of advanced road toll and traffic management systems to reduce congestion on the road network.

• Joint ventures which involve the formal creation of a new legal entity involving both customer and supplier. The new entity can raise funding on its own account, on commercial terms, to pay for infrastructure investment.

• An infrastructure bank. This would be a means of raising funding in the debt markets as a way of paying for or underwriting infrastructure investment. The Green Investment Bank, for example, proposed by the government earlier this year, could help direct investment into greener buildings designed to meet the requirements of environmental legislation and a low-carbon economy.

Which of these models (or combination of models) will suit a particular project depends on a range of factors. To get best value, procurement teams must understand fully the requirement they are seeking to meet, and how that might change over time. They need to be open to new forms of contract and commercially astute. And they need to have the confidence to make a decision and stick with it. There is nothing a supplier likes more than a customer who changes their mind – a licence to print money.

None of these models gets round the underlying fact that finance raised in the private sector will always be more expensive than public borrowing. Osborne may have reallocated £4 billion of public capital expenditure to his infrastructure plan but, for the most part, the UK is going to have to rely on private funds to modernise its infrastructure. That means the public sector needs to get serious about understanding how to get the best value from private investors.

Sir Tim Laurence is a senior advisor at PA Consulting Group. 

You can contact us now or visit our website here to find out more about Public Private Partnerships.

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