Private investment in infrastructure has been in the news following comments by John McDonnell, the Labour Party shadow chancellor, that Labour wanted to bring Private Finance Initiatives (PFI) projects “back in-house”.
This sceptical attitude towards PFIs has not always been prevalent. The last Labour government signed more than 600 contracts between 1997 and 2010 and the Conservative-Liberal Democrat Coalition encouraged pension funds to invest in infrastructure projects on the basis that private capital could deliver benefits to the public sector.
Not fit for purpose
However, critics have said PFIs are not fit for purpose and do not represent value for money for the taxpayer. These criticisms ignore the advantages that come from private sector investment.
The PFI model ensures that the private sector bears the risk that the associated facility – for example, a school, road or hospital – is built on time and on budget and is maintained for the duration of the contract – usually 20-plus years. The private sector’s reward for taking on this risk is a steady, inflation-linked, availability-based revenue stream with penalties for shortcomings set out in the contracts.
These incentive mechanisms mean that the private sector is accountable throughout the term of a contract until the keys are handed back to the public sector. Many early PFI contracts are nearing the time of handback, which comes with criteria concerning the required condition of the asset.
Rather than taking short cuts or profit stripping, this fosters responsible investment practices. Experienced and proactive asset managers, employed by contractors and fund managers, work with all the stakeholders to deliver the infrastructure to the contractually required standard.
It is also worth noting that PFIs have become cheaper for governments. As with all fledgling industries, early PFI contracts were relatively more expensive.
However, a strong pipeline of projects from 1997 to 2010 resulted in healthy competition among contractors and investors. Better understanding ofrisk, with most assets built on time and on budget, has meant the PFI sector attracted more private sector participants. This competition has driven down the cost of new projects for the public purse.
Where Britain led, other markets have followed. The public-private partnership model has been adopted as an efficient method to accelerate the procurement of new infrastructure in countries such as Canada and Australia. The Netherlands is using the model to provide capital investment in infrastructure and Colombia is currently procuring a network of about 40 toll road projects.
Key points
- The Labour Party said that, if elected into government, it would bring public-private partnerships “back in-house”.
- Contract termination would result in payment of compensation to existing investors.
- Cautious investors have favoured UK investments.
Despite global endorsement of the public-private partnership model, thereis increasing political discussion in the UK about the prospect of terminating some of these projects early. However, this would put benefits that the public sector and taxpayers enjoy in jeopardy and could also adversely impact the government’s relationship with the private sector in the long term.
Contract termination, which could take years to implement, would result in payment of compensation to existing investors in line with contractual terms and the transfer of risk back to the public sector. The cost of maintenance and periodic major refurbishments would be incurred and the potential variability of these costs would be borne by the taxpayer.
