What will the infrastructure strategy say about private finance?

This month, on 11 June, the chancellor Rachel Reeves will set out the spending plans for all government departments for the years ahead. The much-anticipated spending review will confirm departmental budgets – including capital budgets – for the current financial year and, critically, detail spending limits for the rest of this parliament.

The announcement will be a particularly significant moment for construction, revealing which departments are going to have resources to spend on new buildings and infrastructure in the years ahead.

However, just as important as the basic numbers on capital spend will be the 10-year infrastructure strategy that the government had promised to release “alongside” the review. The strategy is being drawn up by the Treasury to lay out a long-term plan for the country’s social, economic and housing infrastructure.

And, vitally, the government has said the strategy will set out its approach to the role of private finance in public build projects – across economic, social and housing infrastructure. It has also committed to publishing a pipeline of government projects so that investors and builders can skill-up and prepare for what is coming.

The Treasury has been reviewing the use of private finance in public projects since last autumn, when it set up an infrastructure taskforce comprised of private investors with a brief to boost private investment and report into the strategy. This is critical for construction, because since the cancellation of the private finance initiative (PFI) in England in 2018, there have been few routes for private money to finance the provision of social infrastructure such as schools, hospital and prisons.

As Building has reported, the Treasury’s investigation into expanding private investment has gone beyond existing popular models for economic assets such as utilities, to considering how private money might once again be brought to bear on provision of this kind of social infrastructure.

The big unknown for the sector is what exactly the strategy is going to say on private finance, particularly around social infrastructure. Here Building sets out what is expected – and whether a full-scale return of PFI could really be on the cards…

What exactly is the 10-year infrastructure strategy?

A working paper on the 10-year infrastructure strategy released in January defined it as a “long-term plan for the country’s social, economic and housing infrastructure”. The paper said the strategy will be “aligned with” the spending priorities set out in the five-year spending review, but go beyond this, setting out priorities for a decade ahead.

The paper added that the strategy will “provide certainty to industry on the government’s priorities for infrastructure”, as well as setting out “the government’s approach to the balance of the maintenance, renewal and replacement of assets”.

The strategy is also to specifically tackle the question of bringing in more private finance, with the working paper stating that it will “set out the government’s approach to private investment and infrastructure-related regulation to provide investors and the supply chain with greater clarity on the government’s approach and priorities”.

So, what is the government going to say on private finance in the strategy?

We know from comments by Treasury chief secretary Darren Jones in April that the strategy will have a dedicated chapter on the subject of private finance. A Treasury spokesperson also told Building that the strategy will include the findings of the British infrastructure taskforce – the group of major private investors tasked with recommending how to unlock private investment in UK infrastructure.

What these findings are, and what this chapter will say, has not been made public. Treasury officials were consulting widely on this issue late last year and at the start of the year, but have more recently given little feedback to industry.

>> See also: Are Starmer and Reeves ready to gamble on PFI to fix our broken infrastructure?

>> See also: Is PFI about to stage a comeback?

However, the widespread expectation from insiders is that the strategy will set out a series of potential financial models for levering in private money to public projects, and state in broad terms what types of projects different models might be applied to. One senior industry source said: “The idea will be it sets out how particular models might apply to particular classes of infrastructure.

“It won’t quite say, ‘this is what your project needs to get sign off’. More, for each infrastructure type, ‘these are models we might be willing to entertain’.”

There is little expectation that private finance will be promoted in the strategy in a way that allows a massive expansion of existing build programmes, with the Treasury having an eye to liabilities created by new infrastructure, even where not directly publicly funded or where off-balance sheet.

So, certainly no immediate recreation of a New Labour-style PFI programme, where central government pushed the model on to departments via PFI credits, making it virtually cost-free at a departmental level, and very hard to turn down.

Stuart Murray, partner at law firm Brodies, says rather that it will be about departments and public bodies “having it [private finance] in the toolbox for the right project”.

This all accords with evidence given by officials to the House of Commons public accounts committee (PAC) earlier this month, with Conrad Smewing, director general of public spending at the Treasury, saying: “You should use it [private finance] when it is best value for money […]

“That gives you a level playing field between going down the private finance route or going down the public finance route, and doing the one that you think is best value rather than the one that looks affordable in the short term.”

His colleague, James Bowler, permanent secretary at the Treasury, was explicit: “We are far from saying that we will deliver an expansion of the school building programme only through private finance.”

But which models will the government endorse?

This is the 64,000-dollar question. The evidence given to the PAC made clear how much the government values the regulated asset base model (RAB), under which private finance is raised against assets generating private income in markets given extra security by the presence of independent regulation. This is how the water industry funds infrastructure.

Officials made specific – and approving – reference to the delivery of the £4.5bn Thames Tideway project in the committee session. Thames Tideway was built under a specific form of RAB model, where the government agreed to guarantee the construction cost risk beyond a certain point of overspend, in order that finance costs were limited.

Officials also talked about the use of government loans to ensure projects went ahead, and repeatedly referenced the National Wealth Fund, which is being given a mandate to invest in projects which further the government’s industrial strategy aims – essentially priority projects to help grow the economy. All these models seem very likely to be mentioned in relation to investment in economic infrastructure such as road, rail, bridge, energy and water sector projects.

These models, however, are not necessarily suited for generating investment in social infrastructure. And the positive comments were in contrast to quite negative references made by officials such as Matthew Vickerstaff, deputy chief executive officer of the National Infrastructure and Service Transformation Authority (NISTA), to classic PFI projects, a number of which he said had experienced construction failures.

Does that mean the idea of private finance for social infrastructure – schools, hospitals and prisons – is dead?

Not necessarily. Officials also confirmed to the committee – as the working paper had made clear – that they wanted the strategy to deliver a plan for renewing social infrastructure. Jean-Christophe Gray, interim chief executive officer at NISTA, said: “Both the strategy and NISTA – in a way that was not the case with the National Infrastructure Commission – are looking across economic and social infrastructure.”

It is true that no one thinks the government is about to do a straight re-launch of PFI. However, in Wales, the government has continued to attract private finance to social infrastructure in recent years through its mutual investment model (MIM) – essentially an evolution of PFI – which could provide a template for the government.

Matthew Bevington, policy associate at think-tank the Future Governance Forum, says: “The key question will be whether government merely recommits to RAB-plus guarantees as the only private finance model, which has been used many times recently, or goes a step beyond and commits to building on the Welsh MIM.

“I think there are two reasons to believe the latter might happen. Firstly, NISTA now covers social infrastructure, so they need a model that works for schools, hospitals and social housing, which RAB will not. And, secondly, officials at the committee sounded quite bullish that a more traditional PPP model could be made to work.”

>> See also: What would a new generation of PFI mean for construction?

>> See also: PFI: Do the numbers add up?

Craig Elder, partner at law firm Browne Jacobson, says: “It is strongly suspected that any model which can be “rolled out” will be along the lines of MIM, for example – rather than reinventing the wheel.”

There is also a belief in the sector that private finance will be mentioned specifically in a health context, with health secretary Wes Streeting publicly signalling his support in February, saying that he was “very sympathetic” to calls for an injection of private finance.

A health sector source said: “There will be something on private finance for hospitals, but we don’t think there will be detailed models there.”

How will the strategy relate to the promised infrastructure pipeline?

The infrastructure strategy working paper said the strategy will inform the creation of a pipeline of public infrastructure projects which will “for the first time” combine economic infrastructure schemes with social infrastructure such as, it said, “hospitals, schools, colleges and prisons”.

Treasury officials told the public accounts committee that the pipeline will be designed to help potential investors identify opportunities and that, once published, it will be updated every six months.

NISTA’s Jean-Christophe Gray said: “We have previously had a more construction industry-focused pipeline […] We are trying to develop that into an investor-focused pipeline, because this is all about trying to crowd in investment.

He added that the pipeline will ultimately link individual projects with the funding models used to deliver them, though that would take time to deliver. He said he wanted to give “greater granularity to investors on the types of financing models that various projects are willing to entertain.”

Future Governance Forum’s Bevington says the Treasury has been studying the similar pipeline used by the Australia and New Zealand governments, known as ANZIP, which has “a procurement approach identified for each project”.

When will all this happen?

While the working paper said the strategy will be published “alongside” the spending review, which is due on 11 June, a spokesperson for the Treasury told Building that it will actually emerge the week afterwards, with the pipeline later still.

One senior construction industry source has told Building that the launch of the pipeline has been put back until slightly later in the summer in order for departments to have time to feed projects into it after reflecting the outcome of their spending settlements, plus the private finance plan.

The Treasury spokesperson said: “Spending on infrastructure will be laid out at the spending review and the 10-year infrastructure strategy will be published shortly after, followed by the pipeline.”