Our new government has pledged to limit tax rises while at the same time promising to invest in our NHS, education and energy infrastructure. How will they fund this investment?
It’s becoming increasingly apparent that the private sector will provide a good chunk of that funding - through mechanisms that are still emerging.
Well before the election earlier this month, Chancellor Rachel Reeves met with private investors to discuss how they might fund infrastructure and green energy schemes to “kickstart economic growth”. This was met with a positive response from the private investment community, albeit with some concerns over “excess regulation” – one infrastructure investment manager commented
“If Labour can behave in the next 12 months, and Starmer can manage the extreme elements in his party, people might start believing Britain is investable again.”
Well, then.
Other developments quickly followed the election.
Health Secretary Wes Streeting announced last week that former SoS for Health Alan Milburn would be joining him at the DHSC in an advisory role to “drive through NHS reform”. Those of us who remember developments in the NHS under Alan Milburn’s leadership will point to an acceleration of private finance for capital investment, implemented through the Private Finance initiative (PFI).
In an interview with the Leading podcast last year, he discusses how and why he did this, and the impact it’s had on the health service, pointing out that coming into government in 1997, the Labour party had promised no new tax rises and in order to invest in the health service’s crumbling hospitals, PFI was “the only game in town”. Sound familiar?
Almost immediately after the election, Julian Hartley, Head of NHS Providers called for the return of PFI, commenting
“We need to think outside the box when it comes to solving this double whammy of under-strain public finances and an NHS estate in desperate need of renewal. .Collaboration with public and private partners such as ethical pension funds, property developers, universities, private healthcare providers and local councils could unlock opportunities for NHS trusts keen to build new hospitals or redevelop existing sites which have been stymied by rigid Treasury rules.”
And then last week Chancellor Rachel Reeves announced the establishment of a National Wealth Fund, aiming to “attract billions of pounds of private cash for big infrastructure projects”.
The government sees infrastructure investment as an essential part of its plans for growth, and at a time of limited taxation the use of private funds for this is, as Alan Milburn described PFI, the only game in town.
So what was PFI, and how did it work?
In the mid-90s the Conservative government established a new form of procurement for capital and infrastructure projects, using private finance to keep capital investment off the nation’s balance sheet – generating necessary improvements while reducing the nations debt obligations.
How did it reduce debt obligations, when HM Treasury could always borrow more cheaply than the private sector? Under PFI, rather than borrowing to build, the government contracted with the private sector to finance, design, build and maintain public assets. It then paid regular charges for “services” – health, educational, correctional, transport -- over a 25-30 year period. So rather than having a health asset such as a hospital on its balance sheet, the government paid annual fees for services, coming out of budgeted current accounts.
In order to ensure that the taxpayer was getting a good deal, the treasury designed two key criteria for approving a PFI contract – value for money to the taxpayer and risk transfer to the private sector. These were not always consistently or robustly demonstrated.
Many of those 25-30 year contracts are now coming to an end and, appropriately, PFI is being given a hard look.
One major criticism of PFI was that repaying an investment over 25 years via payments which carried a healthy interest charge was an excessively expensive way of buying new buildings when compared to simply using the public purse. Another criticism was that it was just a way to “fiddle” public accounts without delivering real value to the taxpayer while providing a bonanza for private investors.
While the expectation that partnering with the private sector to finance, build and operate major public infrastructure such as NHS hospitals through PFI would bring in much-needed investment and expertise, in reality it has saddled many NHS Trusts with significant, and often crippling debt repayments that many would like to see directed to patient care. Moreover, when the contracts expire, as many soon are, the risk transfers back from private to public sector.
I was involved for almost ten years in developing PFI hospitals, and I fully understand and accept most of these criticisms. I also saw lots of positives coming out of the PFI process – and not just because it was the “only game in town”.
A central feature of the PFI bidding consortium was a multidisciplinary approach to designing, building and operating healthcare facilities. I set up and ran a consortium that bid on many PFI hospital projects and the disciplines and data required to demonstrate the value for money and risk transfer demanded by HMTreasury meant that old templates for hospital development had to be scrapped and new ones created in their place. Architects, engineers, medical equipment suppliers, patients, clinicians, builders – all were represented in gaining an understanding of how best to design, build and operate a hospital for the 21st century. This was actually a really hard thing for many to do and delivered some world-class facilities – UCH in London is a prime example - and changed practice for the better.
So what’s different now that could make public-private partnerships more effective and transparent in delivering much-needed public infrastructure?
Firstly, we know what to avoid (and what to embrace). The lessons are there to see – and continue to be revealed as contracts expire. But there are also some more fundamental differences in how both public and private sectors operate compared to when the first PFI contracts were drawn up 30 years ago.
1. A new asset class has been created that didn’t exist 30 years ago - data. In some cases it’s a tradeable asset, generating value in its own right (eg NHS health data). In all cases it enables all parties to accurately define and measure the operation and performance, of their investment, with improved transparency and accountability.
2. The private sector has adopted ESG principles and practices and in many cases have committed demonstrably to social impact investing. Asset manager Legal & General is a case in point, having recently launched initiatives to promote health equity in places undergoing regeneration and affordable housing. These commitments mean that a broader mix of stakeholders will be scrutinising investment projects.
3. New standards for identifying, measuring, and reporting value and impact in infrastructure development are now the norm and fully embodied in project planning – biodiversity net gain and social value are two powerful examples. This means that more voices are represented in projects and the full impact of development is comprehensively accounted for.
More data, more transparency, better reporting and hopefully more involvement at local level should mean that future public-private partnerships are better scrutinised and deliver the infrastructure that is needed.
What this will look like has yet to emerge. What is crucial is that local people have a voice and a role to play in the investment of local infrastructure regardless of how it’s funded. Innovation in funding mechanisms must be matched with a commitment to full community engagement.
Clare Delmar
Listen to Locals
16 July 2024
