Katherine Calder and Alison Martin at DAC Beachcroft give their analysis of the return of PPPs in the infrastructure industry and what form they may take.
The PPP model is any form of long-term partnership between the public and private sector – whether contractual, corporate or collaborative – that can be used to deliver infrastructure and services. PPPs are undoubtedly challenging to deliver given their complexity and the many different procurement routes and models that can be used to implement them. For in-house lawyers trying to navigate the infrastructure landscape following Labour’s recent appointment, we have given our analysis of the return of PPPs and what form they may take.
Against its manifesto pledge of promoting economic growth and a new ten-year infrastructure strategy, Labour has announced a raft of new policies in its first few weeks of power aimed at bolstering national infrastructure.
From removing the ban on onshore wind; committing to build 1.5 million new houses; streamlining Nationally Significant Infrastructure projects; to creating a National Wealth Fund (aimed at boosting private investment in national infrastructure projects such as clean steel, gigafactories, green hydrogen and ports); it is clear that Labour means to create momentum, provide confidence in the project pipeline and in turn, unlock private investment in infrastructure.
This means that it may be looking to revisit public private partnerships (PPPs); the question, however, is in what form?
This is unlikely to be the private finance initiative (PFI) – a specific form of PPP between a private party and the public sector where the private sector designs, builds, finances, and operates a public asset and related services for a monthly charge (like a mortgage if you will; but with operational services included). The project finance structure under PFI was all about transferring risk to the private sector and getting the project ‘off balance sheet’, which came at a cost to the public sector. The cost (and profit for the private sector), together with the perceived lack of flexibility, led to the use of PFIs being scrapped by the Conservative Government back in 2018.
No one can pretend PFI was perfect but if one accepts that private finance is needed to deliver major UK infrastructure projects – the government has made clear its fiscal constraints – then there are other models of public private partnerships (PPPs) for doing that.
The Welsh Mutual Investment Model (MIM) used by the Welsh Government to finance major capital projects, such as the Velindre Cancer Centre in Cardiff, is one possible option. It draws on learnings from the original PFI and its replacement PF2 – it enables the Welsh Government to become a minority equity investor in the project; provides greater transparency; removes ‘soft’ services, such as cleaning and catering, which were always problematic and expensive in the PFI model; and requires the private sector partner to create apprenticeships and training places for Welsh workers.
It remains to be seen, however, whether the MIM model will be considered too closely aligned to PFIs and PF2 to be adopted more widely.
There are also the long-term strategic partnerships (delivered via Local Improvement Finance Trusts (LIFTCo’s) and Local Education Partnerships (LEPs) structures), used in the health and education sector to deliver successive projects/phases of infrastructure projects. However, no new projects that we are aware of are being procured using similar structures – yet.
For PPPs to evolve, and readdress the balance of risk, then the government might look to use some of the newer and more innovative forms of PPPs, such as joint ventures and alliancing, to procure long-term, collaborative and flexible relationships between the public sector and private investors. Alliancing – used to deliver several major infrastructure projects in the UK – is where all major participants, including the client, enter into an ‘alliance’ designed to align the commercial interests of the participants (via joint risk/reward arrangements), each participant shares in the success or failure of the project.
The implementation of the new Procurement Act, which allows more innovation and flexibility around procurement routes may help with this.
The majority of PFIs were procured using a rigid ‘competitive dialogue’ procedure, which purported to allow an element of discussion and refinement of bids, but in reality was seen as expensive and confrontational. The new Procurement Act however encourages more pre-market engagement to get the contract and requirements right before the procurement even starts; and then allows the Authority freedom to design a procurement process which is more pragmatic and likely to achieve the ‘most advantageous tender’ in quicker time. For example, initial tenders may be requested simultaneously with selection style questions (now ‘conditions of participation’) to save time. The negotiation stage may include demos, site visits and other useful tools to whittle down capable contractors. There should also be a wider emphasis on national policy objectives rather than lower price.
The governments’ proposed new National Infrastructure and Service Transformation Authority (NISTA) – a merger of the Infrastructure and Projects Authority and the National Infrastructure Commission – may also assist with the evolvement of project design and procurement. Whilst it remains to be seen what delivery powers NISTA will have, its aim is to better support the planning, design and delivery of major capital projects. This presents a real opportunity to reset approaches to infrastructure procurement and PPPs.
If PPPs are to make a return, in whatever form, then there will also need to be a review of the Treasury rules around the use of the private sector funding. In the NHS, for example, the Department of Health and Social Care’s capital expenditure limit (CDEL) has severely curtailed how much NHS Trusts can spend on capital projects each year regardless of where the money comes from.
We do not yet know what funding models or procurement routes will be adopted to deliver the government’s pipeline of new infrastructure projects it is clear that PPPs in some form or other are back on the table.
DAC Beachcroft has a highly-regarded multi-disciplined national infrastructure and projects teams advising both public and private sector clients across a wide range of sectors on PFI/PPP projects. Our team can provide advice and support across the whole project lifecycle, from structuring contracts and procurements through to operational projects, expiry and beyond.