Home' Future Building: The Australian Infrastructure Review : December 2011 Contents 26 futurebuilding
Volume 2 Number 2
The changing nature of UK PPPs
The key is balancing local needs, protected under
the Town and Country Act and introduced after
World War II with projects of national significance.
Nationally significant infrastructure projects are
determined by the decision-making framework set
out in national policy statements.
‘Setting up the National Planning Framework
gives a central application point,’ Segars says.
‘Previously, all planning applications went
through the local level. Having the framework means
that national government has the ability to guide local
authorities in how the decision is to be made.
‘You have to strike a balance between letting local
people have their say and protect their communities,
and what’s good for the country. Sometimes
infrastructure is of national rather than of local
importance,’ says Segars.
As well as streamlining processes, the central
Government can play a key role in marshalling funds.
One potential source is pension funds linked to the
local council pensions. Numbering in the hundreds,
the funds can often be too small on their own to
crunch numbers on PPPs and other infrastructure
investments. That’s a shame, because as equity
markets tumble, their own investments may be feeling
the pinch, Segars says.
‘Local council pension funds are numerous and
they don’t have the critical mass to engage effectively
in infrastructure,’ Segars says.
‘Only the local councils for very large cities would
have the wherewithal to even consider investing in
‘We are looking at ways to make that easier;
whether there are any regulatory or legal barriers that
need to be dealt with to encourage that. Or sponsor
central schemes so that local authorities can deploy
To meet the low carbon targets alone will involve
a massive inflow of funds. A report last year from Ernst
& Young indicated that to fully implement the United
Kingdom’s low carbon agenda will cost upwards of
£450 billion through to 2025.
Traditional sources of capital including utilities,
other corporates, project finance and infrastructure
funds can only provide as much as £80 billion over
that period, indicating a funding shortfall of between
£330 billion and £360 billion, the report said.
Segars estimates up to £110 billion will be needed
by the energy sector by 2020.
With a surge of invitations in the offing to
underwrite gas powered generators, power lines
and wind farms, pension funds will need to do their
homework to assess risks linked to each project,
‘With other asset classes getting hurt, pension
funds are looking for other places to put their money,’
‘They need to get their heads around infrastructure.
Some are safe, like public buildings, and others may
be power generation plants. Both are considered
infrastructure but with very different associated risk.
Institutional investors will need to define their risk
appetite and understand the risks involved.’
The United Kingdom has some £7 billion of PPPs
in the pipeline, including six major hospitals under
procurement, a large number of schools and several
large waste projects and transport initiatives.
Sheffield City Council has a highway maintenance
PPP in the procurement stages, valued at £463
million, with a financial close expected in February
2012. Liverpool is seeking interest from the private
sector to build the Alder Hey Children’s Hospital,
valued at £206 million. That project is expected to
reach financial close in March 2013.
While Segars can’t say how much PPPs have saved
in public spending or how much they have helped
boost efficiency, the approach was key to transferring
risk and safeguarding the government from cost
blowouts and delays.
‘You never really know how much you would
have spent otherwise,’ Segars says.
‘The main benefit of the PPP system is the transfer
of the risk for the construction and maintenance
over very long periods to the private sector, which is
something that didn’t happen before.’
Standardisation, review and sharing expertise
have been at the centre of the success of PFIs in the
United Kingdom, since they got their start in the early
1990s under the government of then-Prime Minister
The central Government standardised processes
so that officials were not always starting from scratch
with each project.
‘The early standardisation of contracts with central
government control over changes to those contracts
meant that the cost of negotiation came well down.
You didn’t start with a blank piece of paper with each
contract,’ Segars says, adding that officials could make
project specific changes.
Over the period from the late 1990s, when the
standardised processes were set up to 2008, there
were four versions of the standard forms. The vast
majority of the more than 700 PPP contracts didn’t
deviate much from those prescriptions, Segars says.
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