Life after the cuts - the future of UK infrastructure
United Kingdom | Local government
Weeks after the Comprehensive Spending Review (CSR) the new infrastructure picture is starting to get at least a little clearer. For some local authorities planning or procuring infrastructure projects, the period of uncertainty is over. For others, the uncertainty still prevails. At best they are adopting a business as usual approach and hoping for the best.
But beyond the current projects, what does the future now hold for Public Private Partnerships (PPPs) and the Private Finance Initiative (PFI)? Some themes are now starting to emerge.
The National Infrastructure Plan - from social to economic
For the first time, the UK has a national infrastructure plan. This is a positive step forward in itself. The plan identifies the scale of the infrastructure challenge and the economic investment that is needed to support sustainable growth of the UK economy.
The link between infrastructure investment and economic growth marks a shift from the previous Government’s focus on social infrastructure, such as hospitals and schools. The 2010 Spending Review confirms that economic infrastructure is the priority. It is this infrastructure that supports growth, the transition to a low carbon economy and encourages private sector investment.
Transport, energy, water, waste and digital communications projects are all identified as key sectors for future investment - with over £40 billion committed by the Government over the period of the Spending Review.
So does the move away from social infrastructure mark a complete break with the past? Will these new projects follow established models or will new forms of contracting and financing emerge?
HM Treasury’s recent technical update on public private partnerships sheds some light.
HMT PPP Technical Update 2010 - building on best practice
When the Chancellor stood up on 20th October, and talked of removing “perverse incentives for projects to be delivered through PFI”, many in the PFI industry feared for the future. But the recent technical update goes some way to allay these fears.
The update starts with an unequivocal Government commitment to PPPs, including those delivered via the PFI. PPP and PFI models are clearly recognised as having a key role to play in meeting the UK’s infrastructure challenge.
It would have been a great shame if PFI had been completely cast aside to make way for new models. After all, the UK’s PFI programme is seen as one of the best in the world. Around 40 countries now have their own PPP programmes and many are based on the UK model.
This was echoed in a speech made by the Commercial Secretary to the Treasury, Lord Sassoon at the PPP Forum annual dinner early in November. He commented that “PPP has brought whole life costing into the public sector; ensured proper due diligence; and drastically improved the risk assessment of projects.”
Many in the industry speculated before the CSR that the Coalition Government would retain the PFI but perhaps “rebadge” it. In fact, HM Treasury seems to be building on the PFI, rather than giving it a makeover. Having confirmed the ongoing role of PPP and PFI, the technical update outlines how the current PPP regime will be strenthened. It focuses on increasing the confidence of both public and private sector participants in this market.
Here are some of the key developments:
- The PFI credits system will end from April 2011. Departments will now be responsible for making grant payments to local authorities from their own budget. Clearly, they will need to consider the economic case of a PFI project, selecting the delivery route that provides the best value for money.
- Measures are included to increase the transparency of PFI projects. PFI has historically suffered from some bad press. The industry will need to pull together to address this as the transparency measures alone are unlikely to dispel some of the myths.
- Infrastructure UK within HM Treasury will work with public and private sectors to develop value for money options for reducing the cost of operational PPP and PFI contracts. There is a perception that PFI contracts are inflexible. But there is often much that can be done to drive value for money through existing contracts.
- Standardisation and the derogations process will continue to be used. Feedback from departments, local authorities, the PFI market and the National Audit Office shows that the standardisation of PFI contracts that started in 1999 has been beneficial. HM Treasury has concluded that all PFI projects supported by central government, whether delivered centrally or at the local level, should continue to follow the standard guidance and seek approvals for derogations from HM Treasury.
- Infrastructure UK will continue to provide refinancing support to local authorities with operational PFI projects. This will help ensure that authorities make good value for money decisions when considering and implementing the refinancing of their projects.
- Updated financing guidance is included to help authorities address the impact of the financial market dislocation on the procurement of PPP projects. This includes guidance on capital contributions and debt funding competitions.
Although not specifically mentioned in the technical update, Tax Increment Financing (TIF) is also on the horizon. New borrowing powers will allow local authorities to borrow against predicted growth in their locally raised business rates. They will then be able to use that borrowing to fund key infrastructure and other capital projects, which will support locally driven economic development and growth. New primary legislation will give local authorities the power to borrow in this way. In the meantime, all eyes are on the Edinburgh waterfront project, the first UK project to be funded through TIF (see our separate TIF briefing for further information).
A strong platform for development
With the CSR and National Infrastructure Plan, there has been a fundamental shift from massive social infrastructure programmes such as Building Schools for the Future, to schemes that will deliver economic benefits at a local level.
PFI has attracted criticism from some quarters in the past but the Government has recognised its value, confirming that PFI is one of a number of means by which the National Infrastructure Plan will be delivered.
The UK has accumulated 15 years’ of best practice in PPP and PFI. Combined with emerging new funding models, we should see a strong platform for local authorities to develop their future infrastructure projects in the challenging times ahead.
For more information or advice, please contact:
Tel: 0845 497 0544
Tel: 0845 497 0698
© Eversheds LLP, 2011
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