More detail and reliability of information is needed in the National Infrastructure and Construction Pipeline (NICP) is needed to ensure private investor confidence in future UK projects, the National Audit Office (NAO) has warned.
In its most recent report, Lessons learned: private finance for infrastructure, NAO has put forward 12 lessons it believes the government must take into account with its ambition of leveraging more private finance for infrastructure projects that the country needs if it is to meet its targets relating to housebuilding, energy, transport and more.
The lessons revolve around three key themes:
- Creating the right conditions to support investor and public confidence
- Making the right decision at policy and project levels
- Adopting a commercial strategy to deliver successful outcomes including value for money
Principle amongst this is what NAO calls the requirement of the forward infrastructure pipeline for public investment needing to be “credible and consistent”.
Since 2016, the Infrastructure Project Authority (IPA) has published its NICP detailing all the major projects the government will continue advancing.
After a three year absence, the NICP 2023 was published last February detailing the 660 public and private sector infrastructure projects in the government’s investment pipeline.
The NAO stated improvements to the level of detail, reliability of information and standardisation of monitoring of projects would reduce the uncertainty around infrastructure investment and financing in the future.
The NAO believes a “stable and predictable” infrastructure pipeline of sufficient size and longevity can support investors to plan for the future while also creating a competitive market.
The NICP has not been updated under the current government, but the IPA has reported that a new infrastructure pipeline would be delivered alongside the upcoming 10-Year infrastructure Strategy.
The NAO report further recommends government departments develop robust business cases with clear assessments of the benefits and risks of using private finance. These should also include mechanisms to balance cost considerations with the need for appropriate returns for investors.
“Not all risks can or should be transferred to the private sector, because the cost of inappropriate risk transfer could be very high,” the report states. “Stakeholders told us that a lack of guidance in quantifying risk for private finance initiative schemes, for instance, helped to fuel some of the misalignment between the additional costs, private sector return on investment and the actual level of risk incurred.”
Using the example of the UK Green Investment Bank (GIB) to illustrate success, NAO pointed out how it had invested in 100 projects and committed £3.4bn of its Treasury capital but also attracted £8.6bn of private capital, equating to around £2.50 for every £1 invested.
In its report, the NAO has warned against making private finance decisions as a means to avoid accounting classifications or achieve “off balance sheet” investment and the eventual costs of maintaining or upgrading assets if they are handed back by the private sector. If costs are not accounted for properly, taxpayers will be exposed to the risks of higher public expenditure over the long term.
It also highlights that government has an opportunity to improve its understanding of different financing models and compare their impacts on the success of future infrastructure investment.
The NAO’s new report echoes that of the Boston Consulting Group, released last month, which said that there needs to be an infrastructure strategy to provide confidence for the investment and for the supply chain.
One major project that is being spoken about with regards to private finance is the plan to build a £9bn road and tunnel scheme between Kent and Essex, Lower Thames Crossing (LTC), for which the government is known to be looking into private funding methods. In updates to its development consent order application, the LTC team has now outlined how it intends to incorporate the potentiality of the project being privately financed, either wholly or partly. A semi-private option would see its total anticipated cost increase to £10.2bn.
The full list of the lessons put forward in the NAO report is:
- Public bodies responsible for mobilising private capital need clear mandates and objectives
- The forward infrastructure pipeline for public investment needs to be credible and consistent
- Public bodies need access to appropriate skills and resources to support investment
- Contracting authorities should apply robust and consistent criteria when assessing the business case for using private finance
- Departments should assess risks, determine who is best placed to absorb them and design agreements that clearly establish the corresponding risk allocation, funding flows and flexibility to address uncertainty
- The government should balance a desire to minimise the cost of finance against providing an attractive investment opportunity for investors
- Project approvals and financing decisions should be based on commercial and operational objectives, and not to meet accounting classifications
- The government should undertake comparable evaluations of publicly and privately financed infrastructure projects
- Contracting authorities should adopt an efficient procurement process that is competitive and avoids undue delay
- Public bodies should actively monitor and review performance even when projects are privately financed and run
- Contingency plans should include protections and alternative options when public services are at risk
- Public bodies must manage contracts across their whole lifecycle, including planning for the decommissioning of assets, extension of contracts, re‑procurement or taking over the operation of the asset
NAO head Gareth Davies said: “The government has set out its ambitions for growth over the next decade.
“Private finance can contribute to that growth through investment, provided that important lessons are applied from different models of financing infrastructure in the UK and internationally.
“Government should take a transparent approach to assessing the role of private finance in major investments, showing how value for money for taxpayers will be achieved alongside appropriate returns for investors.”
Public Accounts Committee chair Geoffrey Clifton-Brown said: “If the government intends to rely on private financing for large infrastructure projects, it must heed the lessons from previous experience first.
“Government needs to be clear with taxpayers about the rationale for private financing by properly evaluating the benefits and costs against publicly funded projects, and provide a credible pipeline of projects to encourage investment.
“It would be wrong to assume that government can pass over all risks to the private sector. As we have seen previously, without the right in-house skills and the data to monitor and oversee these contracts, public bodies can be left to foot large bills when assets return to the public sector poorly maintained.”
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