In this article we look at the views of the Association of Infrastructure Investors in Public Private Partnerships (AIIP) and the newly formed Future Governance Forum (FGF) both of whom have recently reported on the challenges currently facing the UK government in the renewal of its ageing infrastructure. These reports come against the backdrop of the Labour Party's campaign promises of "a decade of national infrastructure renewal".

AIIP – PFI and the Social Infrastructure Challenge

The AIIP was formed in October 2023.Its members represent a significant proportion of investors in the UK PFI market and its principal objective is to "advocate for continuous improvement in standards across the UK PFI industry".Much of the AIIP report The+Private+Finance+Initiative+Model+and+the+Social+Infrastructure+Challenge.pdf (squarespace.com) focuses on responding to the issues faced by operational PFI/PPP projects in the UK, as documented by the White Fraiser Report - GOV.UK (www.gov.uk).

White Fraiser Report – Recommendation for Project Re-set

The White Fraiser Report focused on the behaviours and issues experienced in the UK's mature operational projects market (particularly noting the difficulties experienced in the healthcare sector in relation to the breakdown of relationships and the pitfalls of formal dispute procedures being used to resolve matters).

White Fraiser recommended operational projects consider a "Project Reset" which would enable parties to complete a proactive review of service provision and agree any rectification measures required. Alongside this a period of relief from deductions would be agreed, to encourage Project Companies and facilities management (FM) providers to be transparent with procuring authorities about the performance of the project and assess what is needed going forward.

The hope was that a review of this nature would put the relationships, and trust, back on track in advance of the collaboration that will be required for the successful handback/expiry of these projects. The AIIP report notes the importance of the long-term relationship between the public and private sectors commenting that "the [PFI] model was founded on the basis of partnership working and that concept remains fundamental to its success".

A Decade of Lost Investment

Although the UK was an early adopter, and in many respects a pioneer, of the PPP model, in 2018 the UK government brought to an end the use of PFI/PPP projects in England. The AIIP report identifies England as being "almost unique in having started, and then subsequently stopped, using PPP".

The position has been different elsewhere in the UK with both Scotland and Wales continuing to invest in public infrastructure under the hub (and, prior to that, the NPD model) and Mutual Investment Model (MIM) models (respectively). Further, the Scottish government's Investment Plan to 2025-26 includes the [Scottish] MIM model as "the current model for private finance projects", with the announcement in late 2023 that two sections of the A9 dualling project would be delivered using this model.

  • AIIP Recommendations

    The AIIP report makes reference to the "lost decade of investment", noting that the UK is now a "comparatively low investment nation (investment having averaged just 2.5% of GDP since 2000)". Set against the UK's worsening fiscal position, the AIIP notes the need for the UK government to give consideration to a renewed PPP model and comments that "with the right reshaping, PPP can be a vital tool for ensuring the health of the nation's infrastructure for years to come".

    While the AIIP report makes reference to PPP models used elsewhere in the world as evidence of its successful continued use as a mechanism for delivering social infrastructure, it does not commit to any particular model as being the appropriate successor in the UK without first establishing that issues that have been encountered in the UK market are addressed.

FGF – Rebuilding the Nation

As noted by both the AIIP and the FGF reports, following a prolonged period of austerity the estimated cost associated with the public sector maintenance backlog in respect of its existing infrastructure makes for frightening reading.

The FGF (which describes itself as "a new progressive, non-partisan think tank set up to consider both policy development and implementation") notes (in its report Rebuilding the Nation 03: Infrastructure Investment Partnerships - Future Governance Forum) that this backlog is currently estimated to be in the region of £50 billion. However, as this figure does not include a number of critical categories of public infrastructure, e.g. council housing, street lighting and leisure facilities, it is anticipated that the true figure could be significantly more.

Added to that is the National Infrastructure Commission's estimate of required new economic investment - which the FGF report notes "does not include schools, hospitals and other social infrastructure" – which would see an additional £25 billion per year added to the cheque. Over the 10-year period that the UK government has referred to, this amounts to an eye-watering £300 billion.

To supplement the traditional procurement route, the FGF report looks in more detail at possible forms of PPP structures including the MIM model and the Regulated Asset Base (RAB) approach such as that used on the Thames Tideway Tunnel project. It also suggests looking further afield to the "Precinct PPP model" which has been used successfully under Australia's Victoria state Labour government.

The FGF report notes that "precinct public-private partnerships seek to rebuild and regenerate communities by leveraging wider economic and social benefits from individual projects". In the example given (a new hospital in a Melbourne suburb), the replacement of a 1950s hospital is the "anchor" building, but the project also included a partnership with the local university which funded research and education space within the site, as well as a footbridge to link the hospital and university sites. Further commercial facilities (childcare, gym, pharmacy, medical clinic and other retail spaces) will also be developed, as well as the creation of a community hub.

  • A new model - FGF Recommendations

    The FGF report also makes a recommendation for a new model – Regeneration Infrastructure Investment Partnerships or IIPs. The suggested new model looks to borrow from the Australian precinct structure by focussing on using a large infrastructure asset as an anchor project for regeneration of neighbourhoods/brownfield sites. It notes that this approach would "maximise the economic and social impact of these projects rather than building isolated pieces of infrastructure".

    It goes on to note that enabling the private sector to develop the commercial potential of other unused land on site could also enable infrastructure to be delivered at a lower cost to the public sector. Further, market players who are already familiar with the Scottish hub and Welsh MIM models will recognise the proposed commitments around wider community benefits that such projects can bring. These might include employment and training opportunities and apprenticeships, and also support for local businesses and community projects.

    Importantly the FGF report also addresses a number of strategic planning issues that need to be considered in advance of any new UK projects' pipeline coming to the market. FGF suggest that ahead of the spring budget the government should:

    • agree a new framework for delivering infrastructure projects which includes all of the approved approaches for procuring projects (including traditional procurement, the RAB approach and MIM, andthe new IIP). The framework should be clear about when each model should be used.
    • carry out a market sounding exercise to test the enthusiasm of the market to deliver projects under the proposed framework;
    • invite public sector procuring authorities to submit projects that meet with strategic objectives (with preference being given to projects that intend to "deliver infrastructure at scale whether as single projects or programmes of smaller individual projects)"; and
    • thereafter, the Treasury should develop a pipeline of projects which is aligned with the government's industrial strategy, noting that "there is little value in developing a new framework if not done so alongside a project pipeline [which includes] clarity over how projects are to be financed and sequenced". The suggestion is that the pipeline is published every 6 months.

    Other considerations include:

    • setting a cap on revenue repayments to ensure fiscal sustainability;
    • putting in place safeguards to prevent excess profits;
    • reimbursing a share of bidding costs if competitive tension or confidence in the market is low;
    • a requirement for all public sector bodies to have active contract managers to ensure contract performance is properly monitored by the procuring body; and
    • putting in place a new independent regulator (to deal with the dispute issues referenced by White Fraiser).

What comes next?

It is clear that the government faces challenges on a number of fronts and is operating with a constrained wider environment. To overcome those challenges it will need access to all the "tools in the toolbox". Having a clear, long-term strategy for infrastructure need and development alongside a visible pipeline will be crucial in giving the market confidence that the UK means business and in allowing supply chain partners to scale up on capacity and skills to match anticipated demand.

  • Opportunity to make improvements

    Whilst many in the market may suggest that the MIM model provides an 'off the shelf' solution to unblocking the vast infrastructure need in the UK, it is clear that is not what is being suggested or proposed by either of these reports. There are historic problems with the PFI/PPP model, some of which may fall into the category of 'bad press', but others are well founded and documented.

    Against the backdrop of austerity, the lack of flexibility (specifically in respect of the ring fencing of PFI contract payments) has led to an understandable stakeholder view of these contracts as a heavy burden on the public purse. But there are two sides to every coin – that the cost of maintenance of some of the UK's social infrastructure has been ringfenced is seen by others as a clear argument in favour of the model: PFI/PPP can be a shield, helping to protect assets which may have been left underfunded (as many traditionally procured facilities now are).

    The focus of the FGF report does appear to be lasered in on the new, but the need to decarbonise public infrastructure demands that central and local government put "renewal first". PPP can have a role in the decarbonisation of existing assets, but one size may not fit all and, in considering next steps with PPP, and the need to have every tool in the toolbox, specific structures which build in flexibility and appropriate risk profiles required for refurbishment and which allow the aggregation of decarbonisation across a portfolio of public infrastructure could also be considered.

    Delivery is also a key factor – we are already in the steep part of the standard distribution curve of expiring PFI projects, and the pace of projects reaching handback and expiry will accelerate from here for years to come. Public sector resource has long been identified as an issue on project expiry. Coupled with the need to upskill and deliver a new form of PPP, the public sector will need significant resource in order to deliver.

    The news of ISG's collapse brings into focus the risk appetite, desire and capacity in the UK's contracting market to deliver PPP projects, which have traditionally been inflexible fixed price contracts and were the well-documented root cause of Carillion's collapse. Whilst there has been some work around the edges on inflation exposure in complex new infrastructure projects in the water sector, the common thread on contractor insolvency is the race to the bottom by low margin operations. The new procurement regulations in England and Wales might help with that particular value for money conundrum, but it will need support from procuring authorities and is an issue that will need to be tackled head-on to create the steady market needed for delivery.

Levering private capital into the market will be possible, but investors will need a clear pipeline of projects (as ever) to be identified. The benefit of that clear pipeline in the Irish market is obvious, as new entrants come into the market. From a standing start, that pipeline will not appear overnight and, that being the case, maybe the market has a bit of time to get handback right, before it moves on to the next show in town.

As the FGF report notes, is it time to choose "pragmatism over ideology and realism over wishful thinking"?

Contributors

Stuart Murray

Partner

Fiona Scott - Legal Director
Fiona Scott

Legal Director