The National Audit Office (NAO) has set out the 12 key lessons that should be observed when considering the use of private finance for public infrastructure projects.
Revolving around three key themes, the NAO insights are drawn from a review of its back catalogue of reports and discussions with stakeholders across the public and private sectors on the various models of private financing that are available. The report, ‘Lessons learned: private finance for infrastructure’, aims to support public bodies as they consider how to finance new public infrastructure. It comes as the government is establishing its 10-year strategy for infrastructure investment.
Theme 1
Creating 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. It 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.
Theme 2
Making the right decisions at policy and project levels.
The right information and processes need to be in place to facilitate decision making.
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, and the NAO points out that not all risks can, or should, be transferred to the private sector because the cost of inappropriate risk transfer could be very high.
In addition, the global financial markets condition 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 also 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 report highlights that the government has an opportunity to improve its understanding of different financing models and compare their impact on the success of future infrastructure investment.
Theme 3
Adopting a commercial strategy to deliver successful outcomes, including value for money.
This should be a priority for the government, and to achieve it, commercial expertise will be necessary to undertake an efficient procurement process and manage supplier contracts effectively. Contingency plans should include protections and alternative options to mitigate supplier risks.
Contributing to growth
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, reprocuring or take over the operations and maintenance of an asset after contract expiry. It also points out that private finance can contribute to the government’s ambitions for growth, provided 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.
