Nick Gray is UK and Europe chief operating officer at consultancy Currie & Brown
Between 1997 and 2010, more than 700 new public sector construction projects were successfully delivered, improving the fabric of many key sectors of the economy, such as education and healthcare. Arguably, the delivery of many of these projects might not have happened had it not been for the private finance initiative (PFI) model. In 2018, the Conservative government discontinued PFI for new infrastructure projects, which kickstarted discussions on how best to finance the UK’s acute ongoing need for public development projects.
The PFI problem child
At its core, ()the old PFI model made sense, but it remains controversial. Early PFI contracts were often complex and lengthy, making it difficult to flex them to meet the evolving needs of a project through its delivery cycle. Ultimately, that model became a barrier to progress.
“The prospect of a remodelled form of PFI offers a great opportunity for the construction industry”
The public-private relationships involved in these partnerships have sometimes led to disputes over who is responsible for maintenance costs and repairs. This highlighted tensions, especially in situations where public authorities had limited experience of the PFI structure.
The new Labour government has introduced a National Wealth Fund as part of its plan to ‘get Britain building again’. This will see billions of pounds invested in projects across the UK to foster growth and unlock developments in key sectors and geographical areas. It has been designed to attract a mixture of investment, aiming for around £3 of private funding for every £1 of taxpayer money. It’s an ambitious plan that will place additional strain on a public purse already with a historically high level of debt.
But the government’s plans for growth through public construction projects also provides a perfect opportunity to review the merits of a new form of public private partnership (PPP) – one that would alleviate the burden on taxpayers and provide new investment opportunities for institutional investors eager to deploy capital that delivers against their long-term liability-matching obligations.
An alternative vision
In terms of a new PFI structure, there is already a helpful alternative to PFI in existence. In 1990, the Scottish government introduced the non-profit distributing (NPD) model, which is being successfully applied to new infrastructure projects, predominantly in the education, health and transport sectors. Unlike PFI, the NPD model prioritises delivery of value for money to the public sector rather than profit. While the private sector still plays a role in designing, building, financing and occasionally operating the infrastructure, any profits earned by the project company are reinvested into the project.
Models like NPD aim to address concerns about long-term costs by encouraging a more collaborative approach. By sharing risks and rewards between public and private partners, the NPD model has the potential to incentivise efficiency and cost-effectiveness. It also gives the public sector greater control over project management and the ability to prioritise public needs. This has been a concerning factor in PFI structures, where the private sector was perceived to have a disproportionate influence over the delivery of public services. The NPD model also offers a greater degree of flexibility than traditional PFI contracts, which is better suited to the delivery of complex projects that inevitably evolve and change over the length of their delivery lifecycle.
Upside for the construction industry
The prospect of a remodelled form of PFI offers a great opportunity for the construction industry, as well as social benefits arising from the efficient provision of key public sector buildings and infrastructure. The use of private capital would – as it did in the past – create a long-term pipeline of projects. This would enable the industry to better plan its forward workload, enabling it to invest in itself to improve productivity.
A further important and often-overlooked benefit of PFI was the need for close integration of design and long-term operational efficiency through optimised whole-life costs. Such an approach requires contractors and designers to collaborate to achieve the lowest ‘whole-life’ cost of a building, balancing the initial capital cost with the long-term cost of replacing components throughout its operational life.
This represents a huge opportunity for the industry to forge closer, more collaborative design and construction processes that recognise three things: the direct cost of building renewal/maintenance; the initial and long-term impacts of embedded carbon; and the consumption of carbon through the choice of power, and environmental systems and controls.
For a new PFI/ PPP structure to be successful, it is vital that a new approach to collaboration is firmly established. In particular, clear performance metrics will need to be defined and project outcomes tracked to ensure value for money and public benefit. Open communication and knowledge transfer are crucial to building public trust and acceptance. But new models such as NPD could overcome the limitations of traditional PFIs. Ultimately, they would enable a more sustainable and successful approach to UK infrastructure delivery in the long term.
