Craig Elder
As part of its plan to ‘get Britain building again’ and kickstart economic growth, Labour says it will forge ahead with new transport infrastructure. The Conservatives, meanwhile, have pledged to invest in local infrastructure and speed up delivery of projects.
And while not explicitly mentioned in manifestos, a political battleground has emerged over the state of schools and hospitals, with unsafe concrete used in school buildings and leaky NHS estate being the tip of the iceberg.
At some point, the constant debate on the issue of ageing public infrastructure will have to be turned into real action.
The current opposition parties have been quick to point out – perhaps not unreasonably – that the school estate is “crumbling”. It will, presumably, still be crumbling on 4 July and in need of urgent attention.
But, given further tax rises and increased borrowing have been ruled out by both parties, how exactly can this be funded by a new administration?
The rise and fall of PFI
The last time we saw a sustained period of major public sector infrastructure investment was during the late 1990s and 2000s, when both Conservative and Labour governments deployed the private finance initiative (PFI) as a key funding method.
More than 700 contracts were signed off between its introduction by Norman Lamont 1992 and abolition by Philip Hammond in 2018, financing swathes of new public infrastructure in transport, education, health, leisure, prisons, street lighting and environmental management.
Under a PFI – a form of public-private partnership (PPP) – a private company would fund the upfront costs instead of the government, relieving the public sector balance sheet of the immediate burden of these projects.
The private sector partner would typically recoup this capital, and the ongoing finance and operational costs of the asset, through long-term repayments, known as the unitary charge, from the procuring authority – typically an NHS trust, local authority or government department.
Contracts would often last between 25 and 30 years, meaning the state will be liable to make these payments into the 2040s and with a total “PFI bill”, according to a 2021 Public Accounts Committee report, of about £170bn against assets delivered with a value closer to £60bn.
As a result of this disparity, and a range of other actual or perceived unfairness in the terms of some arrangements, PFI attracted widespread criticism.
Some notable cases involved PFI partners and their investors delivering “windfall gains” by refinancing the debt taken out to construct the asset, following the riskier build phase, at lower rates but without sharing this gain with the public sector.
This was largely addressed as PFI contracts developed, but others were reported to deliver poor build quality and services, and overall poor value for money. Although many PFI projects delivered excellent infrastructure and associated services, the initiative’s reputation became tainted and its use greatly reduced following the election of the coalition government in 2010.
As a result, reviving PFI – or any PFI-like arrangement – could be politically toxic. But given the apparent softening of Labour’s attitude to public-private partnerships – evidenced perhaps by its invitation to independent healthcare providers to alleviate NHS waiting lists – it would be no surprise to see private capital or involvement in public services introduced in some alternative form.
Could NPD hold the key?
One interesting option is the non-profit distributing (NPD) model, which has been used by a number of public authorities in Scotland since the late 2000s to build schools, health facilities and roads.
Developed as an alternative to PFI, it is defined by three broad principles: enhanced stakeholder involvement in project management, no dividends bearing equity and capped private sector returns.
This isn’t to say NPD is strictly “not-for-profit” – contractors and lenders are expected to earn a normal market rate of return – but it does avoid the perceived worst excesses of PFI by capping returns at a more modest rate.
Operational surpluses generated by the project company are directed to the public sector client or a nominated third party, while the public interest is also represented in a governance structure that aims to increase transparency and accountability.
So what’s the catch? Well, transferring risk from a public authority to independent business must be worth the effort, and capping returns makes this a less attractive proposition for operators and their potential investors.
As economies of scale develop, there could be a knock-on impact on build quality to keep costs down, while there may also be opposition from trade unions that object to the principle of the private sector increasing its role in the state.
Public and private must go hand in hand
If Labour leads the next government, it has pledged to set a new strategic direction for big building projects via a new National Infrastructure and Service Transformation Agency that brings together existing bodies, seeking to deliver a more effective and efficient way of delivering infrastructure.
This may result in positive steps forward but a newly constituted QUANGO can only make a certain amount of difference.
Real change depends on identifying a financing model that hits the sweet spot between economic reality and political idealism during a period of challenging financial constraints.
Whether it’s NPD or not to be, it may well involve public-private partnership of some form.
