The National Audit Office (NAO) has recently reported on the choices of finance for capital investment available to public bodies in the UK. Within its report, the NAO comments on how private finance can deliver significant value for money to the public sector when taking account of its financing costs, due to the broader benefits that it delivers. The NAO provides a number of useful suggestions for enhancing these benefits so that public bodies in the UK can take an informed decision on when private finance is used and how it can continue to represent good value for money throughout its duration.
Whilst over the last five years there has been a greater decrease in the use of private finance as compared with publicly funded capital investment, the Government’s National Infrastructure Plan anticipates around 80% of new economic infrastructure investment will be wholly/partially funded through its use. There have been a number of initiatives brought in by the current Government to incentivise its use, such as the new ‘PF2’ delivery model, Pensions Infrastructure Platform and funding guarantees. The NAO recommends that further steps are taken to optimise the use of private finance, including:
- Comparability – Improve decision makers’ access to the terms of private finance projects through a central repository, so that they can review the risk transfer achieved and take an informed decision on whether private finance costs compare favourably with Government borrowing, taking risk allocation into account.
- Performance Monitoring – Facilitate direct comparisons between the performance of publicly funded and private financed projects to allow improvements to be made on existing contracts and new procurements.
- Budget Setting – Review the budget setting process, so public bodies have greater flexibility to change how projects are funded when financing costs become more certain. There is concern that the decision on how a project will be structured is taken a number of years before a project is implemented, and there is limited scope for reviewing the initial decision before finance is arranged. Improved flexibility in this area could secure more competitive funding.
- Refinancing – Many operational PFI contracts have existing mechanisms within them which would allow the financing costs to be reduced, but these are not being used by the public sector to their full potential. Equally, a number of mechanisms allow this flexibility in theory, but the costs associated with refinancing (such as buying-out interest rate swaps) prevent them from being used as much as they could be. Increasing knowledge of these mechanisms and having greater visibility of these costs up-front can have a significant impact on the cost of a project over its term.
There are many factors to consider when determining how capital investment should be funded in the UK. Equally, decisions of this nature have a more prominent role as the 2014 Autumn Statement prioritises long-term projects of this nature over day-to-day spending. The privately-funded batches of the new Priority School Building Programme have shown that private finance is being used effectively and has a central role in the development of the UK’s infrastructure, with Eversheds having recently advised Morgan Sindall and Equitix on the third £110m batch of this scheme. The NAO’s report provides sensible recommendations for how its role can be enhanced further, both for new and operational privately-financed projects.