12 things any new private finance model must address
New private finance models appear to be on the horizon. If that is true, how do we make them a success? Adrian Turner explains.
PFI has faced a lot of criticism over the years (some but not all of it fair), but despite this there is a growing optimism that private finance is back - and is key to delivering essential public infrastructure in the UK.
In recent months, there has been a succession of articles, reports, events and podcasts debating the topic and speculating about the likely direction of travel. Earlier this week, Matthew Vickerstaff (Deputy Chief Executive at NISTA) and others appeared to give oral evidence to the Public Accounts Committee, which is examining the Government’s use of private finance for infrastructure. In February, Wes Streeting, whilst stressing that the past mistakes of PFI could not be repeated, said he was “sympathetic to the argument that we should try and leverage in private finance”. So it's the perfect time to ask ourselves: What can we do to make sure any new model is a resounding success?
The big question is, do we need to go back to the drawing board and completely rethink how we approach private financing of public projects? It's a crucial conversation to have, especially if we want any new programme to meet the government’s original aim for the short lived PF2 programme and be “an enduring solution for funding the infrastructure and services our communities rely on for years to come”.
So, let's open up the debate! What's worked well in the past, and what needs a fresh perspective? Here is my list - twelve things (there are too many for a catchier ‘top ten’) that any new private finance model must address if it is to be a success.
Flexibility
Put simply, contract changes need to be quicker, simpler and cheaper to implement, allowing greater flexibility for contracting authorities
Certification
More robust independent certification, inspection and commissioning to provide greater assurance for all parties that the specification has been met
Reporting
Robust, standardised reporting processes to allow all parties to more easily monitor performance and address issues
Value for money
Additional protections to ensure ongoing affordability and VFM and to protect against windfall gains
Lifecyle risk
Make this a 50/50 shared risk between the investor and operator so interests are aligned and the right behaviours are encouraged
Contract management
A central public sector contract management body or function to support contracting authorities and disseminate best practice
Payment mechanisms
These must be much easier to use, less subjective and better designed to incentivise performance without being overly penal in nature
Behaviours
New formalised structures to manage relationships more effectively and encourage the right partnership behaviours
Conflicts
Protect against potential conflicts of interest where multiple parties (investor, contractor, operator and/or MSA provider) form part of the same group of companies
Transparency
Prioritise full transparency, allow public scrutiny and include robust accountability mechanisms
Standardisation
Drive efficiency through use of standard processes and documents, designed to minimise the procurement period and reduce bid costs
Public sector equity
A minority public sector equity stake to align interests economically and help establish a governance structure designed for success
Adrian Turner is a director at Lagom Advisory.
