Developments in public sector projects: January to September 2012

PLC Public Sector is pleased to announce that Nick Maltby has joined its consultation board as a public projects expert.  As part of this role, Nick will be providing regular updates on market activity in the public projects sector.

Nick Maltby, Consultant and PLC Public Sector consultation board member:

This first blog looks at what’s been happening in the UK’s project market so far in 2012, and sets the scene for the government’s response later this autumn to the PFI consultation.  For details of the projects that have closed in 2012 at the time of writing, see Article, PPP/PFI in the UK: what’s new? January – September 2012.

Is the Westminster Government committed to investing in infrastructure?

The Institution of Civil Engineers has at the time of writing this poll on its website and the running scores are Yes: 16% and No: 83%.  At the same time, the CBI and KPMG have conducted a survey identifying transport infrastructure as the area of greatest concern: nearly three-quarters of firms contacted do not expect to see any improvement in transport infrastructure during the next five years.

These results should be set against a government that likes to make the right noises about growth and has been doing so repeatedly in 2012:

  • In March, David Cameron gave a far reaching speech at the Institution of Civil Engineers in London. Among the ambitions he cited were attracting private investors into the UK road building programme but for new roads only, continuing the investment into rail and overseeing potentially billions of pounds of investment into aviation while at the same time replacing coal fired power stations and investing in gas and renewable energy.
  • In May, Nick Clegg announced that the government would offer financial guarantees to developers of infrastructure and housing projects. This was fleshed out in July when the government published further details. Applications are now open for the up to £40 billion worth of infrastructure projects that might qualify: conditions include that the project is ready to start in the 12 months following a guarantee being given; the project is “nationally significant”; financially credible; not financeable without a guarantee; and good value to the tax payer.
  • Lastly, at the beginning of September, the Prime Minister announced a major housing and planning package that is supposed to help deliver up to 70,000 new homes, including affordable housing and opportunities for first-time buyers to get on to the housing ladder, 140,000 jobs and a boost to the construction sector and a £40 billion guarantee for major infrastructure projects and £10 billion for new homes.

And it has not all been words:

  • In March, the Health and Social Care Act 2012 reached the Statute Book. It is difficult to determine whether it is indeed the radical reshaping of the NHS for the 21st century that its authors intended or simply an unnecessary tweaking of the NHS, which might have been achieved without primary legislation. Much will depend on how the Act is implemented and how the NHS Commissioning Board, the Clinical Commissioning Groups and the revamped Monitor perform their roles.
  • In December 2011, the Local Government Finance Bill was introduced into Parliament and is now at the Committee Stage in the Lords having been through the Commons and portends the biggest shake up of local government finance for 40 years. Business rates will be localised and the block grant will disappear with those authorities which cannot make ends meet from the retention of business rates and council tax receiving a top up and those who have too much paying a tariff into a central pool. The system will be reset at 5 or 10 yearly intervals. Additional business rates collected between the resets will rest with the local authority collecting them, which may choose to borrow against them as a form of Tax Increment Financing. Whether the new system will work as HM Treasury intends is anyone’s guess as the new system makes the complicated system it seeks to supersede seem a work of simplicity. The Bill needs to come into effect by 1 April 2013.
  • In early September, an Infrastructure (Financial Assistance) Bill was introduced into Parliament to give effect to the guarantee proposals. How many projects will benefit from these arrangements remain to be seen although it is understood that the Mersey Gateway Bridge PPP may be one of the first projects to benefit.

At the time of writing, 22 PPP projects have closed in 2012 valued at a cumulative £8.2 billion, with the Intercity Express Programme, which closed in July, accounting for £4.5 billion of this total.  This comprises five education projects, three energy projects, three health projects, two highways maintenance projects, one housing project, one other accommodation project, one transport project and four waste projects. Three of the projects closed are in Scotland.  This figure should be compared with 29 projects closing in the same period of 2011 with a value of £2.7 billion.  While the value is impressive, a review of the projects coming to the market and the Treasury’s own list suggests that rather than heralding a renaissance of PPP in England it is simply the closing of projects originated under the Labour government and which have been around for a while.  As others have commented, PFI remains toxic to politicians of all colours and it remains to be seen whether the PFI Review will do anything to change this. 

We have also had the long-awaited reshuffle as the government moves into the “delivery” phase.  However, this proved to less be extensive than possibly the Prime Minister had hoped.  Almost all the senior government ministers remained in place.  We only saw changes directly impacting on infrastructure at:

  • Environment (climate change-sceptic Owen Patterson replacing Caroline Spelman).
  • Health (Jeremy Hunt replacing the embattled Andrew Lansley, the author of the Health and Social Care Act).
  • Transport (Patrick McLoughlin replacing Heathrow expansion-opposer Justine Greening).

There were more changes at junior minister levels (for example two new ministers in Transport leaving only Norman Baker in place) on the basis that the government was now moving to a delivery phase but the time it will take the new Conservative ministers (there were few changes in the Liberal Democrat ranks) to master their briefs suggests that the results of the reshuffle will be at best mixed. 

So is the CBI being unfair? 

The big question in 2012, and the reason for the scepticism, remains the future of PFI in England and whether any infrastructure pipeline will emerge.  The consultation period on HM Treasury’s Reform of the Private Finance Initiative ended on 10 February 2012 but details of what will replace PFI are not now expected until later this autumn, possibly in the Chancellor’s Autumn Statement on 5 December 2012.  While HM Treasury insists the new model will be significantly different from the old model, given the limited room it has for manoeuvre this may be simply window dressing to persuade politicians, for whom PFI is toxic, that we are not simply embarking on PFI mark 2. Even if a new model does emerge which commands widespread acceptance it remains uncertain whether there will be many projects to be delivered by this model.

One element of the review is the debate on whether pension funds can be persuaded to fund UK infrastructure as is the case in North America.  There was lively debate around this in the Spring and announcements of memoranda of understanding signed with pension providers but the amounts touted were tiny compared to the £200 billion infrastructure need of the UK to 2015 (a figure of £20 billion was originally mentioned) and it is unclear whether the funds are seeking to invest as debt or equity or whether the overall cost will come down.  No doubt all will be revealed when we finally get the PFI Reform announcement. 

The public view of PFI should also not be forgotten.  While 2012 has been quieter on the anti-PFI rhetoric front, it should not be forgotten how PFI fared in 2011 with critical reports from House of Commons Select Committees, a campaign by the Daily Telegraph and the unhelpful attention of Jesse Norman MP.  The public view of PFI has not been improved by the recent events at South London Healthcare NHS Trust, which went into a form of NHS administration in July under the weight of two PFIs, and it is understood that a number of other hospitals are in a similar situation. The key test therefore is to come up with a new model for PFI and a pipeline of projects.  Whether wider economic or political issues prevent this remains to be seen.  Further, while not a strictly PFI issue, public confidence in the award of major government contracts to the private sector has taken a further blow with the cancellation of the award of the contract to run the West Coast Main Line rail franchise to First Group and the accompanying freeze on all other rail franchise competitions (for Great Western, Essex Thameside and Thameslink).

Are the Celtic governments leading the way?

While the PPP pipeline in England continues to diminish, it seems that the governments in Belfast, Cardiff and Edinburgh are finding more enthusiasm for the model.  An increasing number of projects in procurement are in the devolved administrations and the models they are pursuing such as the Scottish Future Trust’s Not for Profit model have something potentially to offer the government in Westminster.  In May, the Welsh Government published plans detailing a pipeline of capital projects worth £15 billion over the next decade.  The Welsh Infrastructure Investment Plan details a pipeline of capital projects including roads, schools, hospitals, housing and other schemes.  The Plan outlines seven high level priorities: improving the transport network in Wales; improving telecommunications networks; supporting the development of the energy industry; investing in housing; delivering more efficient and economical public services in the NHS; improving the quality of the educational estate, particularly schools; and developing Enterprise Zones. 

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