Details of the government’s intentions for funding infrastructure projects were contained in its new 10-year infrastructure strategy published on Thursday.
While the government has pledged at least £725 billion of capital investment for economic, social, and housing infrastructure over the next decade, it said “transforming the UK’s infrastructure will require significant increases in private investment to complement and maximise the value of the extensive public investment underway”.
The government’s drive to increase the supply of private capital is multi-faceted: it is seeking institutional investment in infrastructure, such as from pension providers and investment funds; looking to remove regulatory barriers to investment in sectors such as energy and water; wants to match private finance with “investible opportunities” – including through improved signposting; use public financial institutions, such as the National Wealth Fund and new National Housing Bank that has been announced, to “crowd in” private capital; and make use of private finance models, such as the regulated asset base (RAB) or contracts for difference (CfD) models, to encourage private sector investment in new infrastructure.
In its strategy document, the government said other new PPP models could also be pursued – subject to conditions.
“A well-designed PPP model can bring in private sector discipline to reduce deliverability risk as the private sector is incentivised to deliver to budget and time,” the government said. “In some cases, PPPs can bring these and other benefits to infrastructure projects, but this needs to be balanced with the management of risks and costs. This can be done by the careful, targeted use of PPPs for the projects and sectors where risks can be well managed so that private financing achieves value for money.”
“The government will consider the use of PPPs in projects and sectors where there is a revenue stream, appropriate risk-transfer can be achieved, and value for money for taxpayers can be secured,” it said.
The government confirmed that it will explore the use of private capital to design, build, finance and maintain the new Euston Station, which is the subject of redevelopment plans under the HS2 project. A tax increment financing-style mechanism could be put in place “to capture the value created by development and recycle it to repay public investment”, it added.
The government said it further plans to review how PPP models might be used for taxpayer-funded projects, though it said this would be “in very limited circumstances where they could represent value for money”. Potential use cases in this regard include for delivering new hospitals and other health infrastructure or for decarbonising public buildings, it said.
The government has said it will make a decision on whether to pursue PPP models for taxpayer-funded projects by the autumn budget this year. That decision will be taken “based on co-development of a model and business case between NISTA [the National Infrastructure and Service Transformation Authority] and the relevant department”, it said.
The government said the design and development of future PPP models “will move on from the failures of PFI and PF2”.
PFI harnessed the private sector to obtain finance to design, build and operate infrastructure assets for the benefit of the public via a ‘special purpose vehicle’. In return, the public sector awarded its private sector partner a long-term contract to run the facility and paid a monthly fee over the life of the project to repay the initial loan, meet the operating costs, and generate a financial return as recompense for the risks associated with the whole venture.
Although subsequently subject to significant political criticism, PFI managed to secure the delivery of a wide range of social and economic infrastructure that might not otherwise have been procured – and provided a bridge between immediate capital expenditure funding for projects and the discipline for securing operational expenditure to ensure that those assets were maintained following completion.
In political terms, most of the PFI projects in the UK were initiated by the Labour governments led by Tony Blair and Gordon Brown between 1997 and 2010. The use of PFI solutions, and of PFI’s short-lived successor, PF2, dwindled under the coalition and Conservative governments, before being scrapped by then chancellor Philip Hammond in 2018. Variants to PFI and PF2 have lingered on through the activities of the devolved governments – the so-called non-profit distributing model in Scotland and mutual investment model in Wales.
The government has promised to test new PPP models with the market and learn lessons from past experiences, current models in use, and the lessons outlined in a National Audit Office (NAO) report published earlier this year.
Project finance expert Stuart Barr of Pinsent Masons said: “The clear statement of no return to PFI/PF2 is unlikely to surprise many. Clear signalling of potential deployment in community healthcare and public infrastructure decarbonisation supports a ‘right solution for the right projects’ approach and is consistent with the general themes of the strategy. It is helpful to see a decision point by autumn 2025 for a ‘go, no go’ on that potential deployment, but there may be some frustration from the market that there is further delay on that given the likely further timescales to bring any such schemes to the market.”
Infrastructure expert Jonathan Hart of Pinsent Masons said: “The devil will be in the detail – there are examples in terms of other projects which have been delivered where there has been a combination of government capital funding and use of tax incentive funding – the Northern Line extension to Battersea on the London Underground is a good example – which have delivered for projects and taxpayers alike. The issue here, as always, is how long it takes to bed down the implementation of a new model and fill the gaps in terms of procurement decisions.”
