New thinking to transform the future of public asset management

Craig McGilvray, Managing Director
29 May 2024
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As Private Finance Initiative contracts supporting a range of public assets and services approach the end of their 25-30 year lifespans, Craig McGilvray, Amey's Managing Director for Complex Facilities, explains why now is a moment for change to embrace the opportunity of new ideas and new technologies.

Four years ago, the National Audit Office produced a hard-hitting report into the risks and potential cost of PFI projects as large numbers of these pioneering 25-30 year contracts approach their expiry dates and assets begin to be either handed back to owners or renegotiated for the next phase of service delivery.

The warnings were clear. Without strategic support from government and sufficient preparation from public bodies, vital infrastructure such as schools and hospitals risk being returned to the public sector in a condition that would not meet the future needs of local authorities and end users.

The good news is that, in response to these warnings, the Government’s Infrastructure and Projects Authority published new guidance in 2022. This was designed to help all parties involved avoid these risks by preparing and managing the contract expiry process and service transition that follows.

Despite this guidance, contract expiry still leaves a rake of potential missed opportunities. Advice does not leverage the experience and private sector capability built up by the contracting teams and Special Purpose Vehicles (SPV) over the two or three decades.

Changing the PFI narrative

After 25 years we have learned a huge amount about PFI and service delivery. These contracts were rightly put in place to protect the public purse, however, in places they have created challenges around the adoption of new ideas and investment in emerging technologies. Investment that operators such as Amey now stand ready and willing to make, in return for greater outcomes all round.

While we can spend much time debating the detail and rules of individual contracts, a level of common sense must come into play. The reality is that this innovative financing and delivery method has enabled the public sector to both acquire and maintain a huge number of vital assets and critical services such as schools, hospitals, and prisons. And to keep them in great operating condition.

We must capitalise on this moment and help public authorities to understand the mutual benefits that are being missed and introduce new contracts that enable the opportunities of investment in new ideas to be exploited. The SPVs must be given the tools to make the case to lenders that this is the moment to reinvest and capitalise on the learnings over the PFI concession to maximise the benefits of the initial vision.

Contracts for the future not the past

As such, what is now beyond doubt is that where PFI contracts have been successful has consistently depended on all the parties truly wanting and striving towards the same outcomes – and to be prepared to talk and make changes when this agreement starts to diverge.

The challenge today is to build on that successful dialogue and reinvent the PFI model to enable the private sector to do what it does best – to invest and to innovate and add real tangible value.

As the NAO’s report pointed out, failure to manage the expiry of PFI projects creates significant risks including operational disruption, lack of service continuity, financial loss and reputational damage all round. Strong senior leadership, it adds, is needed from the outset and a recognition that this is a complex matter.

At Amey we understand that the opportunities for all stakeholders are huge. In the 1990s we were in a world pre-internet, pre-net zero, pre-decarbonisation and pre-data analytics. And when you think about the scale of technological and social change that we have witnessed over those last decades, it is clear that the ideas, the contracts, the materials and the measures of success will have also changed significantly.

In short, now is a clear moment for change to ensure that we truly hand back schools, prisons and hospitals that are fit for the future (and not left in the past); a moment to set up new contracts that ensure these vital assets are not left in the past as they move into the next phase of their lives.

Guidance for action, not just words

With the forthcoming General Election looming, now is a key moment to start persuading any future government of the potential opportunities that lie ahead. And of the part that the private sector can and must play.

The IPA guidance document is absolutely correct to point out that these contracts need to be managed effectively throughout their life and throughout the critical expiry process. But what also must be highlighted is the need to work closely with the private sector operators to avoid losing the value built up over the last three decades and the opportunities ahead.

The solution is to ensure that new deals are struck so that local authorities, to all intents and purpose, get investment in their assets for free and that in return the private sector can make a return on investment that can be passed down the supply chain, benefiting countless small and local businesses.

This starts by rolling over existing PFI contracts with new contractual terms that are fit for purpose. That means creating contracts that allow us to take real action to meet the modern demands of assets and take advantage of the rapidly evolving technology changes.

Common sense must prevail

The practicalities of such a change sound difficult. Yet in reality it isn’t - but it does need political will and pragmatism to make it happen. It starts with a focus on what outcomes you want from the contract and being clear and honest with your contractors about what you want.

Fundamentally, a shift of culture is required to take us from defining outputs to looking at the inputs required to achieve desired outcomes.

I believe that, with common sense, we will get there, starting by working alongside our local authority clients about the short, medium and long term mutual benefits of raising such variations to contracts. Once this happens, it is possible for the SPV to approach lenders and persuade them that this change actually de-risks the contract performance so is worth releasing the capital required.

The fact is that, after 25 or 30 years running contracts that don’t facilitate transformational investment, businesses like Amey and the SPVs, have access to capital sums that are capable of being invested to create this new paradigm. And given the current constraints on public sector finances, this capital is on a scale that can only really be dreamt of by local authorities and public sector clients.

Retaining focus on the long term

Business like Amey want to be part of the longer-term solution and the longer-term relationship. We believe in the moral argument that this money should flow back into helping to create better performing and more sustainable schools and hospitals which cost less to run and that deliver better overall societal outcomes.

Inflexible contracts and rigid KPIs of the past must be replaced by forward thinking and flexible arrangements that actively encourage new thinking and drive the private sector to invest in return for better outcomes and greater rewards.

Fundamentally we must not see PFI contract expiry as the moment to exit or abandon it; it is an opportunity to rethink the future not languish in the past.

We want to invest as much as possible in the new technology and new thinking needed to maintain the fabric of buildings but also to provide the public service outcomes that will be required in a very different and rapidly changing future. We were part of building the schools, hospitals and prisons of the future, but we now risk leaving them in the past.

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