Home' Future Building Australian Infrastructure Review : December 2011 Contents futurebuilding 27
Volume 2 Number 2
The changing nature of UK PPPs
Scale is another area where the United Kingdom
Government realised it had to be flexible. Small
projects like a local fire station may be too small to
suit a PPP, because transaction costs such as legal
and planning fees can be a huge proportion of the
‘The design work, the legal work and negotiations
cost just as much for a £5 million project as they
would for a £1 billion project,’ Segars says.
‘There were some early stories where the
transaction costs represented about half of the overall
value. There’s a natural limit.’
Treasury later provided guidance advising that
projects that were under £20 million were unlikely
to suit PFI procurement, Segars says.
The sharing of expertise across the broader
public sector was another key ingredient for
successful PPPs in the United Kingdom. The ability
to share experience meant that inexperienced
agencies and local governments were able to draw
on the experience and expertise of major procuring
The big bureaucracies such as defence, education
and health, which routinely put PPPs to tender,
assembled central bodies of expertise and shared
skills and know-how with their local counterparts.
‘We recognised early on that the private sector
could build on its experience, but it’s possible that
a local government might only ever do one project,’
‘When health, education and defence set up
central areas of PPP expertise, then they were
able to share knowledge with local people doing
In the almost 20 years that PPPs have been in
regular use in the United Kingdom, there have been
lessons learned, Segars says.
Information technology services are generally
unsuitable for PPPs, because the technology can
change faster than the provider’s skill set, potentially
locking users into unproductive contracts.
Inflexible contracts are an area where PPPs have
stumbled. Local councils can get locked into paying
for schools that are too big for a dwindling population
after a mine closes or a military base is wound up.
Local authorities can have hospital beds they don’t
need because advances in medical treatment mean
patients can go home earlier.
Getting out of those contracts can be costly,
‘Those sorts of changes can be expensive because
often the government is locked in with cancellation
fees,’ Segars says.
He admits the United Kingdom can do better
with its infrastructure delivery. The country’s network
of rail, ports, schools, hospitals and other services
ranked 33rd in the world in 2010 – behind Slovenia
– a c co rding to the World Economic Forum’s ranking
of infrastructure quality.
The United Kingdom improved in the 2011
report, moving up to 28th, but it remains well behind
many other developed nations.
Improved competitiveness hinges on better
infrastructure. And private sector involvement will
be key as the Government transitions the economy
and curbs spending to pay back debt, Segars says.
‘It is quite clear that in an increasingly global
market there are significant risks and challenges
to maintain, renew and improve our infrastructure
networks to remain competitive and attractive to
investors,’ Segars says.
‘At the same time we are facing the additional
challenge of reducing our carbon emissions and
making the transition to a low carbon economy – all
this set against the significant fiscal pressures and the
most restrictive spending environment the United
Kingdom has seen for a generation.’
There’s reason for optimism. Even during the
worst of the global financial crisis, the United
Kingdom got all of its PPPs away.
Even so, changes to long-term capital adequacy
requirements under the upcoming Basel III protocol
will prompt banks to reduce their long-term lending
and funnel capital to more short-term projects like
But pension funds and other institutional investors
may be a natural fit for infrastructure because of their
long life and potentially steady income stream.
‘The delivery of effective and timely infrastructure
projects requires a transparent planning and consent
regime that is able to provide a sufficient level of
certainty, to give a timely decision and to be flexible
to the requirement of new infrastructure at both the
national and local levels,’ Segars says.
‘Clearly there are things we could do better, but I
believe the United Kingdom is getting a lot of things
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