National Audit Office: Lessons learned: Private Finance for Infrastructure

A National Audit Office (NAO) report sets out a series of insights drawn from its back catalogue of reports and discussions with stakeholders across the public and private sectors, on the various models of private financing for public infrastructure projects. The report aims to support public bodies as they consider how to finance new public infrastructure. 

In order to create the right conditions to support investor and public confidence, public bodies need clear objectives and a credible and consistent forward pipeline for investment. 

The NAO report highlights the importance of establishing a stable and consistent National Infrastructure and Construction Pipeline. The report identifies opportunities to support investor confidence in future investment by improving the level of detail and reliability of information in the pipeline, including details and value of upcoming investment opportunities.   

The government also needs to ensure it has the information and processes in place to make the right decisions at policy and project levels. The NAO report recommends that departments develop robust business cases with clear assessments of the benefits and risks of using private finance, and mechanisms to balance cost considerations with the need for appropriate returns for investors.

Departments need to identify and assess risks to determine who is best placed to bear them, as not all risks can or should be transferred to the private sector because the cost of inappropriate risk transfer could be very high. 

The global financial markets condition also needs to be adequately considered – particularly to examine the cost of private finance and the attractiveness of the UK as a place for investors. 

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. 

The NAO report highlights that government has an opportunity to improve its understanding of different financing models and compare their impact on the success of future infrastructure investment. 

Lastly, government should adopt a commercial strategy to deliver successful outcomes. To achieve this, commercial expertise is needed to undertake an efficient procurement process, supplier contracts must be managed effectively, and contingency plans should include protections and alternative options to mitigate supplier risks.  

The NAO highlights the need for a whole life approach to using private finance for investments in public infrastructure including, planning for decommissioning an asset, extending a contract, re-procuring or taking over the operations and maintenance of an asset after contract expiry. 

Gareth Davies, head of the NAO, 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.”

ENDS

Notes to editors

1. Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website
2. Infrastructure assets are considered fixed capital assets, which have an economic life of at least one year. They are categorised under two broad headings: economic or social. Economic infrastructure includes energy, flood/coastal defence, transport, water and sewerage. Social infrastructure includes education, health and social care, justice, housing and regeneration.
3. There is a wide range of private financing models for investing in public infrastructure projects including:

• Public Private Partnerships (PPP) with examples such as Private Finance Initiative which was used extensively in the UK between 1992 and 2018. Other PPPs include: the Scottish government's Non-Profit Distributing and the Welsh government's Mutual Investment Model.
• Contractual arrangements such as Contracts for Difference which is the government's main mechanism for supporting new low-carbon power infrastructure.
• Economic regulation such as the Regulated Asset Base model which allows a private sector provider to charge users a regulated price as seen for the utilities sector.
• Financial transactions whereby the government uses debt, grants and financial guarantees to support public infrastructure projects.