Ahead of the Autumn Budget, Browne Jacobson’s Carly Caton and Craig Elder explain how a new public-private partnership model can deliver healthcare infrastructure investment.
With the government under pressure to find new ways of funding large-scale infrastructure projects, attention is turning once again to public-private partnerships (PPP). Yet the legacy of the private finance initiative (PFI) continues to cast a long shadow over any discussion of private investment in public services. Carly Caton, commercial healthcare partner at law firm Browne Jacobson, and Craig Elder, partner in public procurement at Browne Jacobson, argue that a new generation of PPP models could help unlock essential healthcare projects, provided they are designed with proper transparency, serious oversight and a balanced approach to risk.
Why is there a need for a new public-private partnership model now? What’s changed to make this a live issue again?
Craig Elder: The UK is now something of an outlier. In other developed economies, private finance models are used to varying degrees, yet here the government has largely retreated from them.
Our sense is that the experience of PFI, and the well-documented problems associated with it, has left the UK government of all political stripes wary of private finance. It has become seen as a basket case: something too politically and operationally difficult to revisit.
But circumstances have changed. There is now an acute need for investment, with public finances under sustained pressure since the financial crisis and the government repeatedly stressing the importance of infrastructure spending as a driver of economic growth. Private finance is one of the principal mechanisms through which such investment is delivered internationally. For a developed economy to have no national programme at all feels increasingly out of step with global practice.
What went wrong with PFI? Was it the model itself or is it the way it was implemented and managed?
Carly Caton: I don’t believe the problem lies with the model itself. The issues arose from the way it was implemented and from certain elements that, in the early schemes, simply weren’t properly thought through. That created a perception – sometimes a reality – that the private sector was benefiting unduly, far more than seemed appropriate for publicly funded projects.
Much of the criticism stemmed from the headlines: the infamous anecdotes about exorbitant charges for light bulbs and so on. Yet when you look objectively at the full range of projects delivered, the picture is quite different. We secured a large number of new hospitals and other essential infrastructure that would never otherwise have been built, or certainly not on that scale.
The challenge now is to separate out what worked from what didn’t. It’s about taking the strengths of the original model and addressing the weaknesses – in effect, rebalancing the risk so it sits where it properly should.
“The pressures around economic growth are undeniable.”
Does that reputational problem create political obstacles to developing new forms of partnership, even if the underlying principles could still be sound?
Craig Elder: It will be a significant challenge, particularly outside the limited areas the government has previously highlighted – at least in the short term. The pressures around economic growth are undeniable, and with income tax rises apparently off the table, some of the smaller measures that could dampen growth are back in play. The question, then, is whether the political imperative – the recognition that we genuinely need new infrastructure and that we need private-sector involvement – will be strong enough to counterbalance those political headwinds.
But there are broader sensitivities, especially concerning pension funds. Any suggestion that private enterprise might profit from delivering public services is, in itself, politically toxic. In that climate, the detail of how any new model is designed may matter less to some than the principle behind it.
Carly Caton: It’s going to be a very delicate balance. There have been several indications that something would be included in the Autumn Budget – it appears in the NHS’ 10 Year Health Plan and in the national infrastructure plan, and there have been parliamentary responses hinting that an announcement was coming. But the question is whether other priorities have overtaken it in the meantime. My sense is that it will be mentioned in the Budget, but probably in a fairly low-key, heavily caveated way.
NHS trusts face huge maintenance backlogs and outdated estate. What role could private finance play in tackling this without repeating the mistakes of the past?
Carly Caton: There are two distinct streams here. We already have the New Hospitals Programme, which is delivering new hospital buildings without relying on a PFI-style model. In health, the renewed interest in private finance is being presented more as a potential tool to support the shift from curative care to preventative care – one of the three pillars of the NHS ten-year plan. It’s being linked to neighbourhood centres rather than to large acute hospital builds. I don’t see any indication that PFI-type arrangements would be used for major hospital projects going forward.
How do contracts keep patient care and safety as a priority, even when private finance is involved?
Craig Elder: One of the main differences we’re likely to see in future is the potential – or indeed the certainty – of separating out services. Many of the most notorious problems with PFI, such as the infamous £500 light bulb, stemmed from bundling services together. Yes, the bulb itself might cost only a few pounds, but once you included installation, servicing, and the financing costs over a 25-year contract, the price escalated quickly.
A lot of the worst aspects of PFI arose from this integration of services and, at times, poor management. Disaggregating construction from services is likely to be the biggest change.
Carly Caton: Another important point is ensuring that risk is transferred appropriately, but that proper oversight is maintained. In the health projects we’re discussing, the private sector has no involvement whatsoever in clinical care. That simply isn’t part of the model; its role is to provide the facility itself. All clinical and patient-related matters remain entirely within the NHS.
How could regulation and procurement processes be improved to attract responsible, long-term investors rather than short-term speculators?
Craig Elder: One of the clearest lessons from past failures can be seen in cases like the Norfolk and Norwich hospitals, memorably described as “the unacceptable face of capitalism”, which highlighted the absence of refinancing provisions. In those poor examples of PFI, the model encouraged short-term investment: you built the asset, enjoyed an immediate windfall, and then exited, with little incentive to stay involved or take responsibility for the long term.
What is needed now is a more sensible, balanced approach to risk across the whole life of a project, rather than a system that allows a contractor to build something, cash in and walk away. It’s easy to say, harder to design, but what’s required is a genuine long-term partnership – with proper transparency, serious oversight and a partnership board that actually operates as one.
Carly Caton: On the procurement side, the PF2 model (Private Finance 2) was attempted, though only one project – the Midland Metropolitan Hospital – ever used it. That project ended in disaster when the successful bidder, Carillion, went bankrupt during construction.
The issue of procurement was certainly identified as a major problem. The process took years, and the cost for the bidders was immense. Companies spent hundreds of thousands of pounds, only to be deselected at various stages. In response, there were efforts to streamline the system.
Now, with an entirely new procurement regime in place, its ultimate form remains to be seen. For smaller-scale projects, such as neighbourhood centres, the process may be easier to manage. Regardless, improvements are essential, as the previous model was a dreadful element of public projects.
“The government needs to follow through on the policy markers it has already set down.”
Do we need to look abroad? Is that where the good examples are?
Craig Elder: The UK was truly at the vanguard of these kinds of financial models. Other jurisdictions, like Australia, provide an excellent example of how to adapt and advance them. They have developed different variations on the PFI theme, such as not-for-profit distributing models, which have proven very successful.
One striking difference is that in other countries, the manner of service delivery seems to be less politically charged and less dogmatic. The approach is more pragmatic, focused simply on what works. This practicality could potentially be a useful lesson.
If one were attempting to launch a major new initiative like PF3 (Private Finance 3), the political argument could be framed around the idea of learning from experience. The sell would be: “We started this, we have learned the lessons, and now we see that countries like Australia, Canada, and the Netherlands – governments not known for being vociferously right-wing – have used these models successfully.” The case could be made that it is to our benefit, and to the benefit of the ultimate stakeholders, to adopt a similarly effective approach. Whether the current government would be willing to have that complex debate is an entirely different question.
What is needed in the budget?
Carly Caton: The government needs to follow through on the policy markers it has already set down. There is currently enough noise and scepticism in the system, with critics pointing out that, a year in, very little tangible action has been taken. The government has published the NHS Long-Term Plan and the infrastructure plan, planting these flags for the future.
I don’t believe a win needs to be a grand new announcement like PF3. A more prudent approach would be to take slower, incremental steps – to prove the concept on a smaller scale and then apply the successful model to other areas. In short, the government should simply do what it has already said it is going to do, and we can proceed from there.
