Lessons learned: Private finance for infrastructure published by the National Audit Office 25th of March 2025

The report is important because in order to look forward to the delivery of future infrastructure the UK Government also needs to look back at schemes that have gone before and the lessons that can be learnt from them.

Private finance is indisputably an important source of finance for public sector investment for economic and social infrastructure and one which the UK Government is looking to encourage. One model for this with which I am very familiar, was private finance initiative (PFI), which included institutional investors such as banks and pension funds providing debt and equity or related financial instruments to support initial capital investment.

In the autumn budget 2024, the UK Government stated an intention to increase public sector net investment to 2.6% of GDP during the parliament, with over 100 billion of additional capital invested over the next five years (annual public sector net investment averaged at 2.1% of GDP between 2013 and 2023). The Government is working to encourage private investment alongside this increase in public spending, to address infrastructure needs.

The NAO report includes 12 key considerations for decision-makers, grouped into three headings:

• 1. Creating the right conditions to support investor and public confidence
• 2. Making the right decisions at policy and project levels
• 3. Adopting a commercial strategy to deliver successful outcomes

The report makes interesting reading, but the main takeaways or lessons learnt will not be of surprise:

• Public bodies responsible for mobilising private capital need clear mandates and objectives.
• A forward infrastructure pipeline for public investment needs to be credible and consistent. Stakeholders look for detail, reliability of information, and standardisation of monitoring of projects to reduce uncertainty around infrastructure investment and financing. You will see in our 10 year infrastructure strategy article that the National Infrastructure Commission is tasked with considering the key features of an effective pipeline, reviewing international approaches and setting clear objectives.
• Public bodies need access to appropriate skills and resources to support investment. Interim or temporary staff or a lack of qualified staff can lead to poor scrutiny and oversight with the potential to impact on decision making. Again, all seems fairly sensible if not a little obvious.
• Contracting authorities should apply robust and consistent criteria when assessing a business case for using private finance.
• Departments should assess risks, determine who is best placed to absorb them and design agreements that clearly establish the corresponding risk allocation, directing funding flows and maintaining flexibility to address uncertainty. It is a tried-and-tested approach that risks should sit with the party that can best manage such risk. Failure to do so often leads to unmanageable risk being passed to a contractor, which could give rise to their demise or cause them to bank significant profit levels for risks that include significant contingencies which do not transpire.
• The UK Government should balance a desire to minimise cost of finance against providing an attractive investment opportunity for investors. It’s fair to say that there needs to be adequate return for risk being taken and incentivisation for additional upside, but not so much return that that there is unjust enrichment for the other contracting party. The report on Hinkley Point C is referenced here and the distribution of super profits.
• Project approvals and financing decisions should be based on commercial and operational objectives, and not to meet accounting classifications. Please see my colleague’s article on this in an NHS setting.
• The UK Government should undertake comparable evaluations of publicly and privately financed infrastructure projects. This has happened in the past in order to properly understand whether the Government is getting what it pays for, looking at maintenance standards under privately financed projects which could result in materially better assets compared with projects where there are ring-fenced maintenance funds or long-term maintenance contracts for publicly-financed assets. In our experience PFI and PF2 have been criticised for being expensive without properly taking into account the life cycle considerations that the building may have been replaced several times during the contract.
• Contracting authorities should adopt an efficient procurement process that is competitive and avoids undue delay. The latest Procurement Act 2023 seeks to assist authorities in securing efficient procurement processes to maximise the benefits of effective competition, whilst helping suppliers understand authority pipelines and show transparently how performance is evaluated.
• Public bodies should actively monitor and review performance even when projects are privately financed and run. This is particularly necessary where maintenance budgets and lifecycle spend should be exercised to benefit the assets reverting back to an authority on contract expiry, see later on this point.
• Contingency plans should include protections and alternative options when public services are at risk. The NAO report refers to Carillion PLC’s failure in 2018 and the lessons learnt, such that contractual mechanisms should be properly considered for circumstances of supplier failure. This is another way we aim to support clients, with strong monitoring, audit and reporting rights in favour of a commissioner, and other effective rights and remedies to alert parties of companies that may come under distress.
• Public bodies must manage contracts across their whole life cycle, including planning for the decommissioning of assets, extension of contracts and reprocurement or taking over the operation of an asset. The 2020 report on Managing PFI Assets and Services as contracts end and highlighted that the public sector does not take a strategic or consistent approach to managing PFI contracts as they end and that they risk failing to secure value for money during expiry negotiations with the private sector. Whilst work is being done to standardise handback processes, the underlying decades-old contracts do include handback procedures or, where procedures are included, they are vague and inconsistent and it is important that professional advisor advice is sought to ensure that the authority is getting what is contractually expected and priced for, at the end of the contract. Again, this is something we can assist with, having drafted many PFI contracts for both public and private sector parties.

In summary, it’s all sensible stuff. The bigger picture here is the need for there to be increasing market certainty whilst the UK Government sets out its infrastructure plans, the bodies that will look at the pipeline of projects to put forward, the institutional funders that will participate and be regulated in the delivery of such infrastructure, and the much awaited detailed plans for what will be in the infrastructure strategy and spending review in June.

If you have a PFI contract soon to expire, or have a supplier in distress, please contact us, and our team of specialists would be happy to support you.