Government infrastructure ambitions put at risk through lack of credible pipeline of projects - PAC

- PAC report on government's use of private finance warns badly managed PFI contracts leading to poor quality assets being handed back to public sector 

Long-term planning for investment in UK infrastructure is being held back by the lack of a credible pipeline for projects. In a report on government's use of private finance for infrastructure, the Public Accounts Committee (PAC) is warning that the historic lack of detailed information on forthcoming plans has exacerbated skills shortages and put the government's ambitions for infrastructure investment at risk.

The National Infrastructure and Construction Pipeline is supposed to lay out programmes and projects for investment in the coming years to support long-term planning for organisations and investors, from energy to transport, to flood defences, housing and more. However, the PAC's report finds that the value of the pipeline for these purposes is reduced. The pipeline was not published for the years 2019, 2020 and 2022, and due to gaps in data, pipelines were not comparable year on year. Information was also lacking on past performance of projects or when future ones would be delivered.

The report finds that this lack of a credible pipeline has made it challenging for organisations across both the public and private sectors to attract, develop and retain skills in the infrastructure sector. This puts government's ambitions for infrastructure investment in jeopardy, as using private finance to support investment requires public bodies to develop and maintain specialist commercial and financial skills. The PAC's inquiry heard that the lack of a credible pipeline has meant investment cannot be deployed, resulting in skills and labour leaving the country. The uncertain infrastructure environment in the UK has led to a weakening of the essential skills needed for successful project delivery.

For all 665 ongoing Private Finance Initiative (PFI) contracts, public bodies are to pay £136bn in charges up until 2052-53. Half of these contracts are set to expire in the next decade. The PAC's report warns that ongoing challenges around PFI asset condition – for example in schools - need careful management to ensure only quality assets are handed back.

The report further warns of the misplaced belief that risk transfer to the private sector equates to risk management by the private sector, with an accompanying false assurance that the problem lies elsewhere. This is not always the case, as ultimately the government may need to step in if a major supplier of critical infrastructure were to fail, as with Carillion. The PAC is calling for a centrally-developed toolkit for public bodies in the management of risk for infrastructure projects.

The report highlights the importance of identifying which financing models represent value for money for different types of project. HM Treasury has yet to identify the types of financing model it will support for various project types, such as energy, transport, or communication. Doing so will allow public bodies to be clearer on how they might deliver infrastructure and encourage investor participation, drive competition, and improve value for money. The PAC is also calling for a central database to be published covering private finance for public infrastructure, which does not currently exist. This would help the government spot themes and patterns in using private finance for infrastructure, and deliver value for money.

PAC Chair Sir Geoffrey Clifton-Brown MP said: “It is a truism that any investor places a high premium on reliable information, without which it is hard to proceed. Of particular importance are accuracy and certainty of contract specifications at the outset, and relative certainty that the government won't change the contract specification at a later date. Our scrutiny has found a woefully obscured picture for any seeking to invest in big infrastructure projects in the UK, with a corresponding drain of skills overseas.

“Without a long-term, consistent pipeline giving an idea of what to expect in years to come, UK infrastructure risks becoming stony ground for any investor. Government must also move to make sure the right finance model is used for the right project, and to support all public bodies in understanding how best to manage both the contracts themselves and the risk in taking them on.

“The recently-published 10-year infrastructure strategy lays out ambitions which any government would harbour – driving growth, clean energy, delivering hospitals, schools, prisons  - and encouraging private investment. As with a number of areas of scrutiny for this Committee, the government has articulated its desired destination, but in an environment where the exact route remains difficult and unclear. If our recommendations are followed, we hope our report will act as a guide to the government to help it deliver badly-needed growth, a revived skills base, and the better-quality infrastructure this country needs.”

PAC report conclusions and recommendations 

The current infrastructure pipeline is not credible and does not support long-term planning for investors. The Infrastructure and Projects Authority (now NISTA) published the National Infrastructure and Construction Pipeline (the pipeline) from 2016 to 2024 to support long term-planning for organisations and investors. However, the pipeline was not published for the years 2019, 2020 and 2022, and due to gaps in data, pipelines were not comparable year on year. The lack of detailed information about when projects would be delivered, or analysis of past performance further reduced the value of the pipeline. The lack of a credible pipeline has made it challenging for organisations across both the public and private sectors to attract, develop and retain skills in the infrastructure sector. The Treasury and NISTA have now committed to publishing a pipeline every six months. The pipeline is also expected to transform from a construction pipeline that has tended to give information about cost and schedule, to one that gives greater granularity to investors on the types of financing models that government may support for various project types.

Recommendation 1.

1. a) The Treasury and NISTA should set out their plans for improving the pipeline to achieve its objective of supporting long-term planning by investors and other stakeholders.
2. b) The Treasury should write to the Committee, alongside its Treasury Minute response, outlining how the pipeline will support the 10-year infrastructure strategy in delivering infrastructure.

The Treasury has not identified which financing models represent value for money for different types of infrastructure assets. A range of financing models are currently in use for delivering public infrastructure including but not limited to: Contracts for Difference; Regulated Asset Base models; and Public Private Partnerships, of which the extensively used Private Finance Initiative (PFI) is an example.  To achieve value for money, it is essential that the additional costs of private finance are justified by the benefits offered. The NAO has previously reported that the Treasury did not consider the cost of government borrowing to be relevant when making financing decisions on PFI deals, and that the value for money assessment favoured off-balance sheet solutions, which gave the illusion of lower public borrowing. The Treasury now says that the correct private finance model should be chosen for projects and that financing decisions should not be conditional on achieving off balance sheet classification. However, the Treasury has yet to identify the types of financing model it will support for various project types, such as energy, transport, or communication. Doing so will allow public bodies to be clearer on how they might deliver infrastructure and encourage investor participation, drive competition, and improve value for money.

Recommendation 2. To maximise the chances of delivering value for money, the Treasury should evaluate the costs and benefits of alternate financing models, including the different costs of borrowing in the public and private sectors, to identify a preferred model for different types of infrastructure.

There is no central record of private finance for infrastructure investment, which limits the Treasury's ability to spot themes and patterns and deliver value for money. The overall value and number of infrastructure projects delivered using private finance models other than PFI are significant. For example, on the Regulated Asset Base model, around £9 billion was invested – including for Thames Tideway Tunnel and Heathrow Terminal 5. In addition, the government has recently announced that it will invest £14.2 billion in the Sizewell C nuclear power station.  In June 2018, the previous Public Accounts Committee recommended that the Treasury and IPA publish data on the benefits of PFI and set out an approach to evaluating the value for money of operational PFI projects. In 2021, the IPA told the Committee that it was unable to conclude its evaluation, noting that this was because it was unable to make any meaningful conclusions from the data. NISTA, which has replaced the IPA, says it is now collecting more data on performance, asset condition, and PFI contract expiry so that it can learn the lessons. Unlike PFI, other financing models are not monitored by the Treasury or NISTA and there is still no information about how the relevant data will be collected and monitored centrally.

Recommendation 3.   The Treasury and NISTA should publish a central database covering private finance for public infrastructure. This should include (subject to commercial sensitivity), but not be limited to:

• Project synopsis;
• lead department and counterparties;
• capital value;
• finance type, including any government support packages;
• contract length;
• project business cases, including evaluation plans; and
• forecast equity returns to investors.

The government's ambitions for infrastructure investment are at risk of not being achieved because of sector specific skills shortages. Using private finance to support investment requires public bodies to develop and maintain specialist commercial and financial skills. The NAO has previously reported that contracting authorities often had limited in-house skills available to make critical decisions on complex projects, which can place the public sector at a disadvantage. Building specialist skills takes time and the uncertain infrastructure environment in the UK has led to a weakening of the essential skills needed for successful project delivery. The Treasury recognises these challenges and in response has created functions and centres of expertise to support public bodies. NISTA says it is running a number of training programmes and has an associate pool of 60 experts in various fields providing advice and support to public bodies. The government has also announced that the 10-year infrastructure strategy will support Skills England in its assessment of where skill gaps exist that will need to be addressed to successfully deliver key infrastructure projects.

Recommendation 4. The Treasury and NISTA should set out plans for building, attracting and retaining the necessary skills to support public sector infrastructure investment. This includes skills within both the public and private sectors.

There is no comprehensive framework for considering risk allocation between the public and private sector when working in partnership. Risks should be borne by those who are best able to manage them and should be priced appropriately. Not all risks can or should be transferred to the private sector because the cost of inappropriate transfer of certain project risks to the private sector could be disproportionately high, , as ultimately, the government may have to pick up those risks, including the completion of projects if the private sector partner fails or is unable to deliver to the requirement. The lack of guidance in quantifying risk as seen for PFI contracts helped to fuel some misalignment between the additional costs of PFI, private sector return on investment (which was considered disproportionately high) and the actual level of risk incurred. The Treasury says that the benefit of private finance includes the incentive for more risk management within the private sector. However, we heard that sometimes there is a misplaced belief that risk transfer to the private sector equates to risk management by the private sector, and therefore there is a false assurance that the problem lies elsewhere. This is not always the case, as ultimately the government may need to step in if a major supplier of critical infrastructure were to fail, as was the case for Carillion.

Recommendation 5. The Treasury should develop a specific infrastructure financing toolkit to support public bodies in quantifying, allocating, monitoring, and managing risks for infrastructure projects. This should include the consideration of contingencies for supplier failure.

Poor contract management is impacting the quality and condition of PFI assets being handed back to the public sector. Public bodies are due to pay £136 billion in unitary charges up until 2052-53 for all 665 ongoing PFI contracts, with half of these contracts set to expire within the next decade. However, ongoing challenges around PFI asset condition – for example in schools - need careful management to ensure only quality assets are handed back. We were pleased to hear about the hard work that NISTA's PFI centre of excellence is undertaking to manage these issues, including the use of toolkits and experts. We understand that some issues with contract management stem from the assumption that PFI would be self-monitoring, with private sector providers reviewing their own performance and reporting back to the public body on the other side of the contract. This rarely happened in practice and should not preclude public bodies from robust contract management to ensure that private sector providers comply with their contractual obligations. The Treasury and NISTA say that the earlier PFI contracts did not have clear provisions for the condition of assets on their return to the public sector at the end of the contract. To support public bodies in managing these contracts, NISTA has published an asset condition playbook, rolled out technology and other toolkits to support contract managers. The lessons here apply equally to any other infrastructure financing model.

Recommendation 6. The Treasury should set out how it will improve central support for public bodies in assessing the state of their privately financed assets and enforcing contractual mechanisms to ensure that well-maintained assets are returned to the public sector.