• In his budget speech on 29 October, the Chancellor of the Exchequer, Philip Hammond, confirmed that the UK Government will abolish the use of PFI and its successor, PF2, as the basis for future public-private partnership projects, and that he will not sign any PFI or PF2 contracts as Chancellor.
  • PFI has been used by successive UK Governments of all political persuasions to procure and operate infrastructure projects since the 1990s, despite a mixed public and political reaction. In that time, it has delivered over 700 projects, but its use has been in decline over recent years.
  • The UK Government has confirmed that it will honour all existing PFI contracts, some of which will run into the 2040s. However, the Chancellor proposes establishing a Centre of Excellence (within the Department of Health and Social Care) in order to actively manage existing PFI contracts in the healthcare sector.
  • The three projects currently in the PF2 pipeline, namely: (i) the Lower Thames Crossing scheme; (ii) A303 Amesbury to Berwick Down Stonehenge project; and (iii) a group of four prisons, will be financed by other means yet to be confirmed by the Treasury.
  • While the Chancellor explained that he remains "committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector", the Government has not, at this stage, presented any proposals for a revised public-private partnership (or PPP) model for the UK, or a timeline for the implementation of such a model.    

The way forward for public-private partnership in the UK

The formal scrapping of PFI/PF2 is perhaps unsurprising given the decline in the pipeline of projects, on-going public unease about PFI, and a lack of consensus as to whether the PFI/PF2 model has delivered the value for money, innovation and cost efficiencies that were expected. For example, a National Audit Office Report on PFI/PF2 published earlier this year was broadly negative about both models, highlighting (amongst other things) flaws in value for money assessment, significant equity returns by private sector investors despite limited risk transfer to the private sector, the level of outstanding Government liabilities in respect of ongoing contracts, difficulties in obtaining and quantifying cost reductions by comparison with traditional public procurement, lack of flexibility, costs of termination of PFI/PF2 contracts and the lack of institutional capability in public bodies to manage PFI and PF2 contracts.

Despite this, continued infrastructure development remains critical for the UK. Though the Chancellor's comments suggest that publicly funded projects are likely to continue to be the primary route for future infrastructure development, he also made it clear that public-private partnerships, in some form (or forms), remain an option. Like many other governments around the world, with constraints on available public funding the UK Government will also need to consider other potential forms of public–private partnership to harness private sector expertise and finance, where appropriate.

With the shadow of Brexit looming, the need for investment in the UK's infrastructure is only likely to increase. It does, therefore, seem to be an opportune time for the Government to consider new and better approaches to infrastructure procurement, rather than continuing to rely on the inflexible and unsatisfactory PFI formulation. Many of the criticisms associated with PFI/PF2 can be addressed by modifications to procurement processes and contracting structures. Indeed, we are increasingly seeing a diverse range of structures used internationally, from models derived directly from PFI, to others focused on creating an enabling environment for private investment in infrastructure with minimal direct government involvement. In the UK, for example, we may see a greater focus on private sector management, operation and maintenance contracts following publicly funded construction. This may go hand-in hand with partnering and alliancing techniques to develop infrastructure assets. For example, the ongoing Crossrail project in London is under construction using public funds and a project delivery partner approach, whilst the operation of the project will be carried out by MTR under an eight-year operations concession.

In summary, an increasingly diverse range of options is now available to the UK Government for the delivery and construction of future long term infrastructure projects. Whatever option the Government ultimately favours, with the current pace of social and technological change, it is clear that it will need to deliver a far greater level of flexibility, innovation and sustainability than we have seen to date.

Explore More Insight