精东影视

It is more than six years since former chancellor Philip Hammond officially abolished the private finance initiative (PFI) in England, branding the model 鈥渋nflexible and overly complex鈥�.

The Conservatives never warmed to the particular brand of public private partnership (PPP) deals after coming to power in 2010, even though New Labour had by then used PFI deliver more than 600 individual projects across the UK. A reformed version, branded PF2, saw it limp on, but it was only ever used on a handful of projects before Hammond sent it to the knackers鈥� yard in November 2018.

Now, a new Labour government has arrived promising an era of 鈥渘ational renewal鈥� 鈥� but seemingly without any money in the coffers to deliver it. Despite its history when in power, Labour in opposition was no fan of PFI, and ministers are understood to have arrived in the Treasury last summer with no desire to restart a big programme of using private finance for public works.

However, the economy has stuttered and last month the scale of the challenge to the public finances became even clearer, with chancellor Rachel Reeves forced into 拢5bn of welfare cuts to meet her fiscal rules in last month鈥檚 Spring Statement after government .

精东影视 understands the government is now looking again at options for public private partnerships that can draw in private capital to pay for the infrastructure the country needs. Its 10-year infrastructure strategy due to be published in June will set out its approach to private investment, while its advisory group the British Infrastructure Taskforce, is examing lessons from the previous version of PFI.

In this context, 精东影视 is kicking off a series of articles looking in depth at the options for bringing in private finance to pay for public projects: both what is being considered, and what should be.

This is part of 精东影视鈥檚 wider Funding the Future project launched today to look at funding solutions, including how money for public projects can be used more efficiently and effectively.

Manifesto pledges

Labour鈥檚 2024 election-winning manifesto may have been short on specific numbers, but it contained no deficit of broad promises to renew and improve the UK鈥檚 public infrastructure. Pledges committed the party to delivering the New Hospitals Programme, building a new generation of prisons, renewing the road network, accelerating the roll out of EV charge points, investing 拢6.6bn in domestic retrofits and quadrupling offshore wind power 鈥� and more to boot (see Labour鈥檚 commitments panel).

While the cost of these promises cannot be easily quantified, because many are not specific, they will need to be paid for if Labour is to be able to make any argument it has met them. Last November鈥檚 Budget saw chancellor Rachel Reeves re-write her definition of public debt to give her an extra 拢50bn of capacity to borrow to invest in capital spending, allowing her to sidestep making swingeing cuts to capital that had been previously earmarked.

As can be seen from November鈥檚 , this financial shimmy allows Labour to increase capital spend by around 10% - just under 拢10bn 鈥� this year across all departments, to nearly 拢110bn annually, and keep it above that level for the rest of the parliament.

But with that spending needed to cover all investment spend, not just construction, from land to IT systems and all the other equipment needed to deliver services, there is little sense that even that increase will come close to matching the scale of the ambition. The NHS, as it embarks on the 15-year New Hospitals Programme costing anything up to 拢45bn, is set to take alone in the year ahead. Many of Labour鈥檚 other commitments also come with a price tag in the billions: for example, the grid upgrades necessary to enable planned offshore wind power have been priced at a cool 拢54bn by 2030, with another 拢58bn of projects needed after that.

In this context, looking to supplement public money with private capital seems to many in the sector like an obvious option.

Different strokes

Of course, there are multiple ways to bring in private capital to pay for public goods, and the much-maligned PFI model is just one such approach 鈥� albeit the dominant one for many years. The PFI model is a form of PPP in which a special purpose vehicle is set up to design, build, finance and maintain a public facility for 25 years, with borrowing paid back by an annual charge from the public sector client. PFI itself comes in different forms 鈥� as well as the revised PF2 in England prior to cancellation, Scotland and Wales both have their own successful versions, which are still running.

Other common forms of PPP include joint ventures between public and private sector organisations, and, arguably, utilising the Regulated Asset Base (RAB) model which already funds most of the construction undertaken by former state-owned utilities and infrastructure operators like water companies. The RAB model garners investment from long-term institutional investors into big programmes of investment, where the income to pay back the investment is secured by reliable industry regulation, rather than being at the mercy of volatile market competition.

Different industry sectors, clearly, have very different characteristics, and while PFI per se has been closed in England since 2018, public bodies have carried on forming joint ventures where appropriate, and the RAB model has levered in billions of pounds of funding to sectors like energy transmission and water infrastructure, and projects such as the 拢5bn Thames Tideway Tunnel.

Revenue stream

The problem is, the success of RAB cannot be repeated in sectors that do not have a regulator overseeing an ongoing revenue stream that will ultimately pay off the cash borrowed to build the infrastructure in question.

For example, while electricity network operators can borrow money to pay for network upgrades on the basis of future bill income, a local authority or central government will not be getting any income from building a new school which it can use to pay back the finance costs.

Hence, any PPP model designed to finance social infrastructure like schools, hospitals or prisons requires a guarantee of revenue funding from government 鈥� under PFI it was called a unitary charge 鈥� for years into the future. The government is already spending nearly 拢10bn of its day-to-day revenue spend on these PFI unitary charges each year, and is likely to think very carefully before taking on significant further commitments. This will be heightened, particularly given this week鈥檚 spring statement highlighted just how little room for manoeuvre the chancellor has on revenue spend.

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However, despite this, the dire need for investment is nevertheless forcing Labour to again look hard at private finance models. A detailed assessment of the lessons learned from years of PPP projects, published by the National Audit Office last week, showed that the machinery of government is once again paying attention to this issue. It reported that where the right pre-conditions for investment were met, around setting clear objectives, a reliable pipeline of work and a skilled workforce, that PFI delivers usually delivers schemes on time and on budget.

Over the coming months 精东影视 will investigate what works, what is being looked at, and the impact it could have on the sector. With a sea change required in the volume of investment overall, 精东影视 will ask whether private investment will be able to fill the gap where Labour is not prepared to spend directly.