UK: New Models For PPP? - The Prospects For The PFI Review

It seems we are all (still) looking for new models for PPP. HM Treasury in "Infrastructure Procurement: delivering long term value" (March 2008) stated that it wished to encourage a dialogue around alternative models. Before the General Election in 2010 the Conservatives stated repeatedly that "Labour's PFI model is flawed and must be replaced," (George Osborne, Observer, November 2009). It now appears, following a concerted anti-PFI campaign led by the Daily Telegraph and Jesse Norman MP and two adverse reports from Select Committees, that there will be a fundamental reassessment of the model by the Government leading towards a new delivery model which draws on private sector innovation but at a lower cost to the taxpayer. So what are these models, why are they needed and what is their prospect for success?

Before embarking on this journey it should be recalled that PPP has in fact delivered over 900 projects with a combined value of more than £70 billion in little more than a decade. Most of this investment has been in the PFI form It is PFI that has delivered benefits in terms of improved whole life cost risk allocation and management, better integration of design, construction and operational skills and delivery of projects on time and to budget, thanks in part to a greater focus on due diligence by funders. PFI has also benefitted from a huge standardisation process without which it is doubtful that complex procurements of this nature could have been delivered at all. However, the current constraints within the lending markets and yet another determination of whether PFI projects are on or off the Government's balance sheet together with routine complaints about the time and cost of procurement, now threaten to undermine this progress and make PFI an easy target for its critics.

However, is there any real alternative other than a return to conventional procurement? New models, which are cited in "Infrastructure Procurement: delivering long term value", include Strategic Infrastructure Partnerships, Public Delivery Organisations, Alliancing, Hybrid PPP and joint ventures. George Osborne wants a model under which banks finance the construction phase and then the project is sold to investors including pension funds (it is unclear how this differs from the current structure). If we believe that a new model must be capable of replication across a series of projects and of application by public sector teams and approving bodies and result in the delivery of infrastructure, then none of these currently constitute a viable new model.

Conventional Procurement

Conventional procurement accounts for 90% of UK infrastructure spending. However, those looking for new models rarely mean we should resort to conventional procurement, although it is underpinned by a series of standard contracts, is well understood across public and private sectors, is easier to procure and has absorbed many of the lessons of PFI (hence its use in the BSF programme).

Strategic Infrastructure Partnerships (SIPs)

SIPs exist at present in the LIFT and Local Education Partnership environment and were evolving wider remits before the Coalition came to power. They are arrangements between the public and private sector to address a series of infrastructure projects over time. However, they are underpinned either by PFI or conventional procurement as the means of investment and therefore do not represent a new infrastructure model at all (whatever their other merits).

Public Delivery Organisation

Under this approach, a public body procures a public delivery organisation (the integrator) to manage the procurement of underlying assets and services and integrate them to provide a service to the public body. However, like the SIP, it is a procurement model not an infrastructure model and unlike the SIP there are few live examples.

Alliancing

"An alliancing approach involves two or more parties who share risks and rewards to enable the successful delivery of joint objectives", (Infrastructure Procurement: delivering long term value). Unlike most other PPP models, risk is generally retained by the public sector. At the time of publication, HMT could cite no examples of this approach.

Hybrid PPP

Hybrid PPP is a model, which shares the characteristics of some of the other approaches. With many PFI projects coming on to the government's balance sheet it might be thought that this is an attractive model. Elements could include shorter contract terms, milestone payments, less equity, government guarantees and a move away from "no service, no fee". Government has to date resisted this and indicated it wishes to stick to SOPC4. However, of all the models, Hybrid PPP would appear to offer the greatest potential for development into a varied menu of infrastructure choices. Indeed, what Osborne is now offering appears to be simply a type of hybrid PPP. However, let us be under no illusion. The structure will only work if there is either a public sector income stream or the asset is free standing and affordable based on user charges (like toll roads or bridges).

Joint Ventures

Joint ventures cover a multitude of relationship. There is of course nothing new about such joint ventures. However, the fate of the Wider Markets Initiative would seem to indicate that this is unlikely to be a panacea. Local Asset Backed Vehicles are particularly in vogue but it seems unlikely that this model will be applicable everywhere.

What can we conclude from this? The truth is that the only potential new model beyond conventional procurement, PFI and joint ventures is Hybrid PPP. While the previous government was reluctant to go there, it may be that this is where George is now heading - although to read into this the end of PFI seems to over egg the potential of the new model. After 18 months of dithering it was to be hoped that the Coalition Government would begin to take the growth imperative seriously and accept that they should work with existing models and get the process (competitive dialogue/international experience) to work better, sort out those sectors where there are road blocks (social housing and waste) and unlock the funding market (assuming it is locked). There will of course be occasions when other forms of complex procurement are required but there seems little sense in the whole public sector gearing up for it. If we need (yet another) name change then so be it.

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