As the government establishes its 10-year strategy for infrastructure investment, a new report from the National Audit Office (NAO) has set out the key lessons when considering the use of private finance for public infrastructure projects.

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.

The 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 says.

The 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.

Image source: National Audit Office analysis of 2023 National Infrastructure & Construction Pipeline

The NAO says 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.

NAO warns against making private finance decisions as means to avoid accounting classifications or achieve ‘off balance sheet’ investment

The NAO is warning 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. Infrastructure investment frameworks referenced in the report include:

• Direct Procurement for Customers (DPC) for major new infrastructure in the water sector - DPC model introduced by Ofwat
• Specified Infrastructure Project Regulations (SIPR) -SIPR model introduced by Ofwat
• Economic regulation Regulated Asset Base (RAB) - RAB model allows a private sector provider to charge users a regulated price for utilities such as water, including an element in bills to fund new investment

Lastly, the report says the 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 is also highlighting 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 commented:

“The government has set out its ambitions for growth over the next decade, the NAO says 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.”

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