Evolving infrastructure models in the UK -- one step forward, two steps back?

Photo: Jonathan Meddings | Flickr Creative Commons

The United Kingdom has been a leading player in the development of Public-Private Partnerships (PPPs) since the inception of the Private Finance Initiative (PFI) in the early 1990s. PFI is a structure that introduced project finance into UK public services for the first time. Under PFI, a private sector consortium builds public assets and services them over a term of 25 to 30 years in exchange for an availability payment. Successive governments have taken full advantage of the policy’s ability to leverage private finance and thus generate additional infrastructure investment, beyond typically constrained capital budgets.

An often under-reported feature of the UK’s PPP policy is the variety of approaches it takes.

The UK’s devolved political structure has encouraged numerous models to evolve, with Scotland, England and Northern Ireland all following different paths that reflect local needs. Now it is Wales’ turn to enter the fray. The Welsh Government recently announced its new PPP-style model for infrastructure investment , the Mutual Investment Model (MIM), which will be used for both economic and social infrastructure projects. So we have another acronym to add to the ever-growing list, along with PPP, PFI, PF2, NPD, DBFM and more—but what else is new?

Wales has hitherto been a reluctant user of PPP-style projects compared with the rest of the UK. England has undertaken over £50 billion of investment in PFI projects, Scotland over £5 billion, and Wales just £500 million. Political concerns about the UK’s traditional PFI approach have driven this; there has always been controversy over the lack of political control over public assets and deemed excessive private sector profits generated through PFI. Ample capital budgets ensured this was no great hindrance to adequate infrastructure investment. Since the global financial crisis, however, much-reduced capital budgets have meant the Welsh government needed an innovative approach to deliver additional infrastructure investment  while also seeking to mitigate against those prevailing political concerns.

Elsewhere in the UK, the Scottish Government’s Non-Profit Distributing (NPD) model seemed to achieve this “best of all worlds” scenario. NPD combined the crucial generation of additional infrastructure investment, through leveraging private capital with:

• Increased public sector control over projects by means of a public interest director on project company boards;  and
• Capped profits for the private sector to ensure value for money for the public purse.

However, it was these very features that made the NPD structure fall afoul of Eurostat accounting rules. This meant all NPD projects were classified as part of national budgets, and as a result, NPD is no longer able to generate additional infrastructure investment.

Enter the Mutual Investment Model. Crucially, the new structure is deemed by the Welsh Government to be compliant with the Eurostat rules and so meets the first requirement of being able to generate additional investment. But how does it seek to achieve those wider political objectives?

Instead of capped returns to project sponsors, the MIM allows the Welsh government to take a minority equity stake in the project company. The public sector will share the projects profits alongside the project sponsors.

Instead of exercising control over the projects, the procuring body has the power to appoint an observer to the project company board. This will ensure access to all relevant information and will allow transparency over the actions of the project company from the public sector.

Potentially the most radical innovation introduced by the MIM is the introduction of an optional funding competition following the appointment of the preferred bidder for a specified proportion of equity in the project company. The intention is to introduce equity from long-term investors and to reduce the potential for windfall gains on secondary market sales. How this will work in practice remains to be seen. One unintended consequence of this could be the unravelling of commercial positions agreed with the preferred bidder to meet the requirements of the incoming investor. This new power will need to be used carefully if it is to bring the benefits it promises.
 
In summary, the Mutual Investment Model continues the trend we have seen in the UK of PPP models evolving to meet local political and market needs. Its move away from public sector control and capped private sector returns, however, takes MIM back to resembling the original PFI model in some key ways.
 
Is this a case of one step forward and two steps backwards? Perhaps not—the true test will be whether the MIM can deliver additional infrastructure investment on time and on budget.
 
To learn more, the key issues around the MIM structure are discussed in more detail in the Welsh Government’s user guide to the new standard legal documentation.
 
 
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