Public private partnerships: the record isn't great

Using private money for public investment hasn't been an unqualified success
Champions League final 2011
Much like football, PPP started out in the UK, but is now done better overseas. Photograph: Tom Jenkins

The use of Public private partnerships (PPP) has been a bold experiment and has led to some innovation - but overall, the record has not been great.

PPP in the UK began nearly 30 years ago with the Channel Fixed Link, while the Private Finance Initiative (PFI) - a UK speciality - celebrates its 20th birthday this year.

These schemes have undoubtedly allowed the UK to acquire social infrastructure earlier, helping to stimulate short-term economic growth, but it has led to an overhang of debt stretching some 30 years into the future and to constraints on the way public bodies are able to use their assets.

Moreover, the value for money advantages of PFI have been achieved only in narrow circumstances and PFI schemes have often been "mis-sold", while the public sector has revealed deficiencies in the skills necessary to work with private finance.

This is a very real problem. The UK whole of government accounts for 2009-10 reported £29.9bn of PPP/PFI liabilities on the balance sheet, with a total of 642 signed contracts were in place by November 2011. The Treasury is now conducting a review of PPP/PFI and its future.

One of the most curious aspects of PPP/PFI in the UK is how their use is justified.

There are two traditional justifications. One is where there is not enough money in the public purse, PPP could be the only way to build vital infrastructure. This is an 'additionality' justification, which would be expected in a developing economy.

In wealthier economies, value-for-money is the justification: is PPP cheaper than the public sector alternative? Singapore adheres rigidly to this principle, commissioning only eight PPP projects in the seven years after PPP became government-approved.

When there has not been severe public spending constraints, the UK has maintained that value-for-money is the only official justification for PFI. In reality, however, the UK has often pursued PPP/PFI for non-value-for-money reasons. PPP/PFI was seen as a super-sized credit card. Many supporters of public sector projects have expressed concern about being pushed into privately-financed procurement reasons not because they provide value for money, but because it was seen as the only way to get new things built.

One reason the value-for-money justification struggles to gain traction is that it is so hard to prove. The benefits offered by private finance, the transfer of risk from public to private sector, and improvements in decision-making processes are too nebulous to provide any certainty that they outweigh all the known PFI/PPP problems.

Compounding this problem has been the lack of commercial awareness in the public sector. PPP/PFI guidance has suffered from confusion (from 2000, when the Treasury insisted value-for-money be the only criterion for investment appraisal, departmental guidance elsewhere continued to stress non-value-for-money PPP/PFI advantages) and, while there have been vast improvements over time, the public sector still struggles to adequately define the PPP/PFI outputs it wants or to negotiate effectively with the private sector to achieve them, leading to cost over-runs or unexpected consequences.

PPP/PFI has undoubtedly allowed the UK to acquire social infrastructure earlier, helping to stimulate short-term economic growth, but it has led to an overhang of debt stretching some 30 years into the future and constraints on the flexibility of public bodies in using their infrastructure.

There have been mistakes and misunderstandings, but also innovation. New forms of PPP/PFI continue to be developed, with the introduction of a new Green Investment Bank and a nice reversal of the principles behind PPP with the possible finance and construction of High Speed 2 by the public sector for lease to private operators.

Still, following in the steps of football and cricket, PPP wouldn't be the first time the UK has pioneered something, only to see it perfected overseas.

Gillian Fawcett is head of public sector, Association of Chartered Certified Accountants, which has published a report on PPP and PFI schemes around the world.


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