Will the NIC’s recommendations resurrect private financing for UK infrastructure?

Stephen Johns, partner in law firm Weightmans’ built environment practice.

The National Infrastructure Commission’s first national assessment provides an opportunity to resurrect private sector funding of UK infrastructure, says Stephen Johns.  

On 10 July, the National Infrastructure Commission (NIC) published its blueprint for the future of infrastructure development in the UK. It made a broad range of recommendations, covering everything from de-carbonisation and connectivity, to urban transport. 

If this ambitious agenda is to be delivered, private finance will have to play a part. One mechanism - the Private Finance Initiative (PFI), now branded as PF2 - is currently little used. But, the NIC report might offer part of the solution - a new analytical framework that could evidence its benefits and ultimately lead to more spades in the ground on infrastructure developments. 

At the moment PFI has a reputation problem. Critical investigations from the Public Accounts Committee and National Audit Office have raised valid questions over its value for money. The former recently criticised the government for not understanding how PFI projects compare to conventionally procured equivalents, and for being unable to articulate which schemes can best benefit from PFI. 

Yet, the negative attention PFI has received belies some of the genuine advantages it can deliver. For public sector procurers, initial investment costs are absorbed by the developer, allowing the project to be funded across its lifetime. Projects are often more efficient, with the involvement of funders instilling operational rigour and ensuring they run on time and to high level of quality. Risk is effectively transferred away from the public sector.  As a method of financing, it merits consideration.   

It’s true that private financing is more expensive than traditional procurement. But, until now, there has been no reliable way to measure its overall performance. This has made it difficult for the PFI industry to defend itself in the face of political hostility. 

According to the NIC, in 2006 and 2007 there were over 50 private financing transactions each year, with over £5bn in transaction value in both years. By 2015, just four PFI projects reached close with a value of just £0.6bn. The suspicion remains that the market never really recovered after the financial crash because changes to public sector accounting rules meant privately-financed projects are now less likely to be excluded from the Treasury’s balance sheet. In the absence of this benefit, critics say, PFI has no future.

The NIC’s analytical framework will help on this front by accurately evaluating the performance of private financing, both quantitatively and qualitatively. It will offer a whole life analysis of individual projects, looking not only at cost, but also risk allocation, asset performance, economic impact and sustainability. This comprehensive view will help demonstrate the less tangible value private financing can deliver and give government and industry a better steer on which infrastructure projects it’s most compatible with.   

The government will then be able to leverage private finance in a more targeted way, selecting the type of projects that have a track record of success. It could lead to developers and contractors seeing a more concrete schedule of public-sector work that otherwise wouldn’t have made it to market. Ultimately it could also increase the availability of private capital and encourage a broader scope of investors to enter the infrastructure arena, such as pension and sovereign wealth funds. 

The NIC recommends a pilot phase to test the framework. If it passes muster, the government should embrace it to take advantage of the benefits private financing can offer and deliver a boost to UK developers, contractors and their supply chains. 

Stephen Johns is partner in national law firm Weightmans’ built environment practice.