NAO Report - Lessons learned: private finance for infrastructure
Yesterday, the NAO has published its report on the lessons to be learned from private financing of infrastructure.
The report is timely in the context of the government’s ambition to rebuild Britain against a backdrop of a chronic lack of investment, life safety risk in the public sector estate, an estimated maintenance backlog of £49bn and capital constraints that will be laid bare in the Spring Statement.
The Report has 12 key considerations that are grouped into three headings:
Creating the right conditions to support investor and public confidence;
Making the right decisions at policy and project levels, and
Adopting a commercial strategy to deliver successful outcomes.
1. Creating the right conditions to support investor and public confidence
It is hard to argue with any of the three considerations raised.
The first is that public bodies responsible for mobilising private capital need clear mandates and objectives and the report rightly signals the huge potential for the creation of NISTA to provide the strategy and stewardship around pipelines and new models but that it won’t be NISTA alone that generates infrastructure investment. The Report rightly identifies that Cabinet Office and the Government Commercial Function has a huge role to play in curation of commercial models, procurement and contract management but that much power resides with Sponsor Departments who will need capital to address the gap between spending review settlements and the political ambition to rebuild Britain. Huge questions remain unanswered for the government. If politicians want spades in the ground and photo shoots of Ministers and officials in visi-vests on construction sites, who is going to take control and coordinate all of this? How will the overlap between these institutions be managed? Who will be responsible and accountable for setting direction and going beyond resplendent strategy on paper to actual delivery with ground being broken? Where will the political direction come from that is necessary to vest power in a singular overriding institution to meet the objective of Darren Jones to unlock the "inertia" around UK investment and to meet with the Chancellor’s expectations that the UK will have the highest G7 economic growth rate. Is the creation of NISTA going to be enough?
The second is for there to be a pipeline for public investment that is credible and consistent. It is essential that government says what it is going to do and then does what it says and for investors to have confidence that plans are more than aspirational - pre-election this was highlighted by Darren Jones as the biggest problem. Furthermore it is imperative that there is a public sector and private sector pipeline in recognition that market capacity will have a bearing on delivery timelines, price and affordability and some market stewardship might be a good thing.
The third consideration is for public bodies to have access to the appropriate skills and resources to support investment. This is something that has been repeatedly flagged by the NAO and the Public Accounts Committee. As early as 2006 resource shortages in relation to the management of infrastructure assets was highlighted by Partnerships UK. Since then commercial professionals have been asked to do more with less, particularly in the wake of the spending cuts from 2010. A bad situation in 2006 has almost certainly got worse. There are still problems with resourcing and there are clear deficiencies in terms of people, processes and the use of systems that are required by the Government Commercial functional standard and set out in NAO Best Practice Documents. As the NAO rightly identifies, by reference to White Frasier, these problems also apply to SPV management of PFI assets so there is a need for there to be the right private and public sector resourcing.
2. Making the right decisions at policy and project levels
One of the considerations in the second NAO heading is for departments to determine who is best placed to absorb risk and design agreements that enable the right allocation of that risk. Helpfully the Procurement Act should more easily facilitate this through the changes to procedures. The evolution of PFI in other jurisdictions, where its ongoing value as a model is recognised, is also helpful in setting out how to more effectively allocate risks and design funding flows and flexibility.
Another key consideration raised by the NAO is for project approvals and financial decisions to be taken based on commercial and operational objectives and not to meet accounting classifications. This will come as welcome news to all those who repeatedly find “balance sheet treatment” and ESA10 as reasons for not doing things that on face value confer mutual benefit to the private and public sector for the benefit of end service users. It would be unfortunate if balance sheet treatment was used to thwart the deployment of private capital to address the ever-growing infrastructure deficit. It must be made to work or relegated in any decision making criteria.
3. Adopting a commercial strategy to deliver successful outcomes
This section of the report potentially lays a significant challenge at the door of the Government Commercial Function and its new leader Andrew Forzani. Will it be left to sponsor departments to meet with the NAO’s suggestion of having an “efficient procurement process that is competitive and avoids undue delay,” or will there be a role for some kind of central oversight from the Cabinet Office. At the very least some guiding principles from the centre for the benefit of contracting authorities around the procurement of infrastructure assets in the context of the Procurement Act might be a good idea.
The suggestion that authorities should actively monitor and manage performance seems a worrying statement of the obvious but is stated by the NAO - presumably because of the White Fraiser finding that some authorities think that PFI contracts are self monitoring rather than self reporting. As we have said before, nobody should assume and everybody should assure,and assurance of performance is essential. There is an enormous risk that if prospective PPPs are as sophisticated and complicated as traditional PFI agreements and there is not the commensurate investment in SPV and public sector contract management support there will be problem projects that spiral out of control due to reporting that is unfit for purpose, a lack of trust, complacency or unduly and short-termist adversarial contract management.
The final suggestion is that public bodies manage contracts across their whole lifecycle. This is a chronic problem. It is why Curshaw is concerned with the whole of the commercial lifecycle. It is still widely the case that provider bid teams “pitch and switch” so after contract award the bid team exits stage left and a new set of relatively uninitiated people with little or no relationship with the public sector come in and mobilise. Similarly down and through the supply chain construction companies hand-off to facilities management companies which can lead to issues later on especially around defects and defect remediation - even if construction co and FM co are the same body corporate the teams are often completely different and the handoff introduces risk. For contracting authorities similar challenges present in the form of procurement teams reaching contract award and then throwing contracts and contract management functions. This is exacerbated if there are no contract management plans in place and there are no established business processes to support contract management and administration and limited or no investment in systems that are fundamental to keeping an up to date and fully conformed electronic version of the contract and transparency of asset data and related maintenance. When projects are taken to market and competed there needs to be an approach that directly addresses and manages the associated risks with the inevitable handoffs throughout the life term of contracts.