PFI was meant to deliver improved cost certainty, efficiency and quality – so what went wrong? Mark Bew points the finger at poor project briefing
Whether you are a domestic customer upgrading a bathroom or a public authority building a new hospital, setting out precisely what you need and expect from your investment is a pretty fundamental first step. It is not rocket science to suggest that failure to embrace this step can generally lead only to overspend, late completion and disappointment.
On this basis the National Audit Office’s (NAO) latest damning report into the performance of PFI projects across the UK public infrastructure realm is certainly worth a read. The headlines from this comprehensive piece of work are clear. With 716 PFI and PF2 projects – a total capital value of £59.4bn – either under construction or in operation, the UK central and local government faces the prospect of paying for these assets and services until the 2040s, to the tune of £199bn.
The report raises some important points around the cost of finance and the impact on cash-strapped public clients of the inflexibility built into many of the deals signed over the last few years. There are indeed many examples of bad deals being done at the taxpayer’s expense.
Listening to numerous tales of disappointment on all sides of recent PFI deals struck across transport, health, education and justice, it is clear that many of its problems have stemmed from a basic failure to get the brief right
But equally the report highlights the critical need for clients, whether embarking on a project procured under a PFI deal or a more traditionally financed arrangement, to absolutely nail the brief from the start. That means deciding precisely what outcomes are needed from the investment – as distinct from those wanted – and exactly what risks, roles and responsibilities will be transferred as part of the contract.
Reading the NAO report and listening to numerous tales of disappointment on all sides of recent PFI deals struck across transport, health, education and justice, it is clear that many of the problems have stemmed from this basic failure to get the brief right.
Reviewing the drivers behind the use of PFI reveals some sensible thinking to engage the private sector and tackle some of the biggest problems seen across the life cycle of assets. As the NAO points outs, this aspiration comes down to leveraging the private sector to create:
- Certainty over construction costs – the private sector is incentivised to build assets to budget as it bears the risk of construction cost overruns.
- Improved operational efficiency – the special purpose vehicle has an incentive to consider how it can reduce long-term running costs at the outset, as it bears the cost of operating it.
- Higher-quality and well-maintained assets – the PFI deal requires assets to be well maintained during the contract period and handed back in an as-built condition, meaning that users benefit and assets have potentially longer lives.
Whatever form of contract is chosen, the key to success is for clients to set at the outset a brief focused on outcomes
These objectives underpin the ultimate aim of creating and maintaining an asset – be it a road, school, hospital or prison – that adds value to the public it serves and enables the services provided to be better, more effective and more efficient.
My concern, reading the NAO report and the subsequent media commentary on its findings, is that we once again find ourselves down in the weeds arguing about capital cost and operation spending. Don’t misunderstand me: in this era of constrained public finances, these are important measures. The NAO makes a valid point when it says “current pressures on public sector budgets are resulting in significant reductions in maintenance spending on non-PFI assets in some sectors”.
It highlights the pressure on health trusts – one of the biggest users of PFI, which between 2014/15 and 2015/16 reported an increase in the critical infrastructure maintenance backlog of more than 50% to £2.3bn. However, the solution to this backlog was simply for the Treasury to let the NHS move more than £1bn earmarked for capital investment to its operational budget to pay for day-to-day spending.
Yet, as work by the Digital Built Britain programme last year showed, the greatest return on the public sector’s infrastructure investments will always come from increased service delivery. The reality is that a 10% saving in the UK’s £89bn annual capital spend on public infrastructure or its £122bn operational investment is dwarfed by even a 5% improvement in the £597bn contribution to GDP the services these assets provide. Improved outcomes must therefore be the foremost focus for investment.
Investment remains critical to the UK’s post Brexit economic plans. The most recent National Infrastructure and Construction Pipeline contains some £600bn of planned and proposed work over the next decade. The NAO report itself points out that delivering infrastructure using private finance is critical to the government’s infrastructure pipeline.
Alongside the PF2 model, it expects to continue to use other forms of public-private partnership (PPP), which, as the NAO highlights, have successfully delivered local government waste deals, off‑shore wind transmission infrastructure, university accommodation, and the Department for Transport’s purchase of rolling stock.
Without question there are many ways we must learn from our track record of PFI and PPP investment deals to ensure this future, vital engagement with the private sector is improved to deliver greater overall returns to customers in the long term.
Whatever form of contract is chosen, the key to success is for clients to set at the outset a brief focused on outcomes: to identify their needs, understand what it will cost and ensure the asset investment made actually generates measurable improvements in public service.
Mark Bew is strategic advisor to the UK’s Centre for Digital Built Britain and is chairman of engineering consultancy PCSG