The Association for Consultancy and Engineering has looked at PFI deals signed over a 15 year period by government departments, finding that the more projects a department undertook, the lower the eventual cost to the taxpayer. This suggests a need to examine what worked well and badly within the PFI system as reforms are taken through to finance new infrastructure using different models.
The study, entitled Performance of PFI – 1996-2010 – lessons learned, is the first of a series looking at how the UK will finance future infrastructure investment. It was undertaken to highlight the lessons that could be learned from PFI in order to better inform new ways of thinking about financing projects.
The least expensive department was the Department for Communities and Local Government. It undertook 64 projects and faced public sector costs over the lifetime of the contracts of £2.69p for every pound of private investment generated. This contrasted with the Ministry of Justice, which undertook just 23 projects and faced a cost to the public purse of £11.53p for every pound of private investment generated.
Chief executive of ACE, Nelson Ogunshakin OBE, said: “There was clearly a divergence between departments that shows the need to review and learn lessons. Those that had built up a greater deal of experience in running PFI deals appeared to procure them more effectively. This may suggest that government is right to look at creating a central team, through the Efficiency Reform Group to drive efficiency across departments as it seeks new ways of financing vital projects.”
The research, which looked at deals done through 1996 to 2010, also suggests that the first five years of PFI, from 1996 to 2000, were the most costly for the taxpayer for every pound generated in private investment. The period from 2001 to 2005 was the least costly spell for PFI, with the cost to the taxpayer rising again in the last five years, possibly because the financial crisis raised the cost of private capital.
However, there was little divergence in the cost to the taxpayer between larger and smaller PFI deals, suggesting that large complicated deals were not more likely to prove expensive than relatively small deals. This being the case, private investment may still prove valuable in future for projects of all sizes.
Nelson Ogunshakin said: “It is important to note that there seems to have been a tangible rise in the level of experience in procuring PFI projects over time, and perhaps within industry in delivering through PFI, that made it less costly for the taxpayer. This means that as the UK looks to meet its infrastructure needs it should learn the lessons of what PFI did well and where it struggled to ensure best practice and develop better more flexible models. ACE will be looking at what these new flexible models should look like in its next paper.”
Notes to Editors
This paper is the first of a new series of infrastructure financing papers from ACE. It looks at 15 years of Private Finance Initiative experience in the UK. The paper establishes the lessons learned, both positive and negative, that must inform new thinking on project financing if the public and private sectors, and most importantly the taxpayer, is to get the best possible value for money.
The analysis of this data looks at the unitary payments as reported by HM Treasury. The data does not provide a breakdown that would allow for a detailed analysis of the scale and number of components that make up these unitary payments. This subsequently makes value judgements difficult. However, it does allow us to make comparisons over time, across departments and over capital ranges.
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Table of department spending in unitary payments over the contract per £1 of private sector investment.
| Government department
|| Scale of linear
and unitary payments
| Ministry of Justice
| Department for Transport
| Department for Environment,
Food and Rural Affairs
| Department of Health
| Welsh Assembly
| Scottish Government
| Ministry of Defence
| Northern Ireland Executive
| Department for Education
| Home Office
| Department for Culture,
Media and Sport
| Department for Communities
and Local Government
Table of average cost to government in unitary payments over the contract per £1 of private investment in each of the five year periods.
| Scale of linear relationship between
capital investment and unitary payments
ACE’s financing infrastructure series
This series of papers will examine how the UK can secure much needed investment in its social and economic infrastructure in the coming years.
Achieving this is important. Infrastructure has been highlighted as a primary driver for economic growth, as well as a means to deliver the UK’s goal of a hi-tech, low carbon and globally competitive economy. However, the UK is acknowledged to have both a shortfall in quantity (estimated by some at £434 billion1) and quality (the UK was recently ranked 28 for the overall standard of its infrastructure by the World Economic Forum2), hampering efforts to achieve these goals.
The timing of this series is also important in relation to proposed solutions to the UK’s infrastructure challenges. At the UK level, the National Infrastructure Plan is moving from its formative stage to delivery. Infrastructure solutions in the Devolved Nations are also taking shape, with examples, such as the formative Welsh Infrastructure Investment Plan being developed.
Developing sustainable models and sources of funding and financing for these proposed solutions, -especially in tough economic times with a restricted public purse- will require new thinking. Helping to identify these new models and sources of funding and financing and removing the blocks and challenges to them is the aim of this ACE investment into infrastructure series.
This series of papers will explore a range of options available to government as it looks to secure investment and raise the UK’s standing for infrastructure standards. These include the development of the Green Investment Bank, the potential for pension fund investment, new public-private finance models and alternative methods.
1 Policy Exchange
2 World Economic Forum Comprehensive report 2011-2012
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Author: Editor Gavin Pearson (firstname.lastname@example.org or 0207 202 0255)