The gulf between private and public sector views on the attractiveness of private sector ownership of infrastructure is huge. While the private sector cites its track record of successful project delivery and cost controls, the public sector seems to have lost faith in private sector delivery; as has the public more generally.
If not addressed, this gulf poses an existential threat to existing and future private sector ownership and delivery of infrastructure, to the detriment of both the private and public sectors.
Issues raised in the recent National Audit Office review of the Private Finance Initiative reflect wider held views about private ownership and need to be addressed by the industry.
But a total switch to public sector delivery is not the answer to mistrust of the private sector; the public sector lacks the breadth of skills across government and where it has delivered projects successfully, it has often relied on importing private sector skills. The Infrastructure Forum's earlier paper on alternative finance models argued for a mixed economy of both public and private sector delivery, to share skills and benchmark performance. For new infrastructure, we need an approach where the public sector can enjoy private sector skills around managing risk, cost controls and technical due diligence but where it can also trust private owners will have a long-term focus and be flexible and customer focused.
There are a number of features of current ownership models that prove particularly toxic to the public at large in the context of providing public services and infrastructure. Wider stakeholders simply do not trust that private ownership is in their interest. The underlying causes of mistrust are structural; if companies focus on maximising shareholder value, with a particular short-term focus, then this mistrust will always prevail.
An increase in contractual controls or regulation would not solve these issues nor re-build trust in the private sector; it would lead to a worse, less stable relationship.
The private sector needs to fundamentally change the governance of its infrastructure companies if it is to build trust and maintain a prominent position in the ownership and delivery of infrastructure. This has two elements to it: for new infrastructure; a change in the infrastructure model to a lower cost long-term model, and for both new and existing owners of infrastructure; a fundamental review of governance and goals, which is the key focus of this paper.
A new approach should ensure a clear articulation of corporate values which must be enshrined into governance so that wider stakeholders can trust performance. Alternative governance approaches can be adopted including through Articles of Association or introducing a Trust Board to uphold corporate values. Each company should evaluate what it needs to do to fundamentally rebuild trust with stakeholders; the public mood suggests in all cases this needs to be quite radical.
The governance of a Trusted Infrastructure Company might enshrine a variety of measures such as a commitment to long term stable returns, investing in infrastructure sustainably, customer and stakeholder representation on the board, aligning management pay with long term performance, limitations on financial engineering, and a commitment to working with not against the public sector and stakeholders.
Private sector adoption of more trusted governance does not mean diminished returns, but longer term, less volatile returns to investors. Investors in infrastructure can still get enhanced returns through capital gains, but by selling a performing company managed for long term sustainability not to maximise short term value.
The public sector also has to radically change how it works with the private sector and chooses partners on projects; its current approach is not sustainable. The approach has transferred too much risk on contractors who are exiting the market. Instead, it should encourage models that attract long-term investors at lower cost and in evaluation it should favour companies with the governance and commitment it wants in the long term, not simply lowest cost. This approach will strengthen, not weaken, the private sector contracting market.
The combined approach of a model designed to deliver long-term, lower, less volatile returns, combined with governance that enshrines and builds trust offers radical alternatives to current approaches. It could be adopted in a wide number of sectors such as roads, rail franchising and construction, nuclear, electricity storage and distribution, and could be rolled out more widely at the local authority level, and in health and accommodation sectors.
The historic focus by Government on achieving 'off balance sheet' deals as a prime driver for advocating private ownership has been a major contributor to the use of the high risk transfer and contractually rigid approach of the PFI market, with a high cost of finance as a consequence. On the one hand, if balance sheet treatment were a secondary consideration, it could allow a more collaborative, low-cost model to evolve, getting the best from both sectors. On the other hand, as recent deals have proved, the long-term model described in this and TIF's earlier paper can be off balance sheet for the right deals, so would be attractive to those that still prioritise balance sheet treatment. The public sector can enjoy low-cost private ownership, which if combined with long-term public-ethos governance, offers an attractive alternative to public sector ownership.
There is an opportunity to overhaul the relationship between the public sector and private sector, to the benefit of both parties. The public sector needs to consider how to get the best from the private sector, developing long-term, more trusted relationships. In turn, the private sector has the opportunity to radically change the way it behaves and is seen to behave, with a stronger more trusted, less regulated relationship with government; it needs to take the initiative to demonstrate how both sides can benefit from a longer-term, more trusted working relationship. The breakdown in trust and confidence in private ownership is widespread; it needs to be addressed now.