Introduction

Attending the Partnership Bulletin's Year Ahead event on the 21st January was a sobering experience, particularly for those of us interested in the reinvigoration of our nation's investment in our social infrastructure. Whilst the event started positively, touching upon the government's programmes in the energy, water and transport sectors, it quickly took a pessimistic turn with warnings that the UK ecosystem for investment in our infrastructure is a "challenging one". 

Key words were repeated throughout the morning which I scribbled and underlined: "stability"; "optimism" and "pipeline" – all of which we don't appear to have. Why not? There seemed to be unanimous agreement that the phrase "PFI" (and its successor PF2) has had an awfully bad press and should cease to be verboten. We invented the PFI, exported it to the rest of the world which has pragmatically seen its value, adapted and improved it – but the UK remains ashamed of it and seems to consider it should be relegated to history. What a shame indeed, for without private investment, how does the next era of hospitals, schools, leisure centres and more get built? 

"Courage" was the other word I took away from the event, in the form of a plea that ministers find some and address the paralysis head on.

In this article we will look at some of the different PPP models which have been used in the UK since the early 90s and consider what models may be used in the future to provide improved infrastructure throughout the UK. Whilst the use of PFI and PPP in England has ceased since 2018, Wales and Scotland, through their devolved powers, have developed their own forms of PPP which they are successfully using to provide new infrastructure. Forms of PPP are also used across the world.

Key similarities in PPP models

The PPP model provided for the following key principles to be adopted across all models used in the UK. 

• Off balance sheet (for the Contracting Authority) accounting treatment
• Risk transfer to the private sector through
  • Responsibility for building the PPP asset to an agreed specification, and
  • Operation and maintenance of the PPP asset throughout the term of the contract
• Payment by the public sector only commences on completion of the construction of the asset, and
• Deductions for failing to make the asset available and for performance failures throughout the term

Using these general principles different structures were developed to meet specific infrastructure needs with the contracts used becoming standardised as the market matured.

Key PPP models and their structures

PFI / PF2

PFI was developed in 1992 and was the first form of PPP used in the UK. A contracting authority procured a private sector partner to design, build, finance and operate a single identified project. A PFI Project SPV company (“Project Co”) was set up to carry out the project. Project Co entered into a PFI project agreement (“PA”) with the contracting authority.

In earlier PFI projects the Contracting Authority granted a lease (separate to the PA) to the Project Co for the PFI site which the Project Co then sub-leased back to the Contracting Authority for the term of the Project. In later projects the PA contained a licence for Project Co to occupy the site to undertake the construction and to provide the services.

The key structure of a PFI is:

• A design, build, finance and operate contract, typically for a 25 year operation period but can be longer. The Project Co will construct the PFI premises and then operate it for the term of the PFI
• A fixed monthly 'unitary charge' payment (a proportion of which is indexed each year) is made by the Contracting Authority from the completion of the build until the expiry of the PFI Project Agreement
• Hard FM (including lifecycle replacement) and typically but not always soft FM services will be provided to the Contracting Authority
• Deductions from the unitary charge can be made by the Contracting Authority for performance failures or if areas in the building are unavailable
• Whilst there was little standardisation in the earliest PFI project agreements standard form documentation was developed as PFI evolved underpinned by HM Treasury's 'Standardisation of PFI Contracts' (SoPC)

In 2012, PF2 replaced the PFI model following concerns regarding value for money. PF2 was broadly similar to PFI, in that the project structure and financing was the same (with the exception of soft facilities management, which were removed from the scope). However, the intention was that PF2 would provide greater transparency around the financial returns of project companies. Under PF2, the public sector took on the role of a minority shareholder in the project and the government required shareholders of PF2 projects to report on their financial returns to HM Treasury, which would then be published. PF2 was discontinued in 2018 due to concerns that the structure was too complex and placed too much risk on the Government.

NHS LIFT

NHS Local Improvement Finance Trusts (“NHS LIFT”) are a form of PPP which began in 2001. The aim was to modernise the health estate, generate investment in primary care, improve the environment where these services are delivered and to provide more care in the community. A total of 49 LIFT companies were established which were 40% public and 60% privately owned, the majority being in areas of above average health needs. The NHS LIFT programme differed from a PFI contract as the structure allowed for a number of separate projects to be developed and operated under separate agreements. 

This was possible as contracting authorities procured a private sector partner to exclusively provide partnering services to it over a period of 20 years. The LIFT company established for the project entered into a strategic partnering agreement (“SPA”) with local participants (this could include NHS bodies, local authorities and other public sector bodies) to provide services including health and social care planning, strategic estate planning, capital works, regeneration and new buildings. New projects were developed through the SPA and allowed for a number of premises to be constructed as part of a LIFT project. This contrasts with traditional PFI where only the buildings contained in the original procurement were provided.

For earlier LIFT projects, for each project that was developed, the contracting authority entered into a lease plus agreement (“LPA”) with a wholly owned subsidiary of the LIFT company (“FundCo”). Standard form documentation was used for the SPA and LPA with only genuinely scheme specific amendments permitted. Key issues to note with an LPA are:

• FundCo own the property developed and leases it to the public sector for a 25 year period (the duration of the LPA). On termination, the property will revert to the FundCo which differs from a PFI structure
• The LPA has a single unitary charge (indexed) over the term of the LPA
• Deductions can be made for availability and performance failures, and
• The LPA only provides hard FM and not soft FM services

For later LIFT projects a Land Retained Agreement (“LRA”) was also developed for use, usually on larger value projects, and for projects over £25million a PFI project agreement was used. The Contracting Authority retained ownership of the land throughout the term of the LRA or PFI project agreement and therefore would own the building on expiry. 

Building Schools for the Future

Building schools for the Future (“BSF”) was launched in 2003 and sought to renew or rebuild all of England's secondary schools. Like NHS LIFT a private sector partner was procured by the local authority to provide long term strategic partnering services through a company called a Local Education Partnership (“LEP”). The LEP entered into a SPA with the local authority to grant the exclusive right to provide these partnering services over a term of 10 years (renewable for a further 5 years). This allowed a number of schools to be built in tranches throughout the term of the BSF project. ICT services were also typically provided alongside D&B and FM services. Standard form documentation was developed for use in all BSF schemes.

For each school that was developed, a separate Project Co (being a wholly owned subsidiary of the LEP) would enter into a PFI agreement with the local authority for that school. The school would therefore remain in the ownership of the local authority with the LEP having a lease or licence to occupy it during the term of the PFI agreement.

Scottish Futures Trust Hub Programme

The Scottish Futures Trust Hub Programme (“Hub”) was established in 2010 with the creation of five Hubs each having a HubCo, a company owned jointly by the public (30% public sector participants and 10% Scottish Futures Trust) and private (60% private sector development partner) sector shareholding. The Hub establishes a long-term partnering relationship between the HubCo and the public sector partners across each Hub and the HubCo provides accommodation and related services to the public sector participants.

For each project developed by the HubCo the relevant public sector partner enters into an agreement with a wholly owned subsidiary of the HubCo (Sub HubCo). The type of agreement used will depend on whether funding is required for the project. Funded projects will use a Design, Build, Finance and Maintain contract ("DBFM") which is based on the Scottish standard health PPP contract and which follows very similar principles to a PFI contract in England. Capitally funded projects use a Design and Build Development Agreement ("D&B"). Standard form documentation has been prepared for use by all Hubs. 

Mutual Investment Model

The Mutual Investment Model ("MIM") was developed in Wales and launched in 2017. As of March 2024, the following three projects were being delivered through MIM, demonstrating the structure's use for directly procuring individual projects and for procuring strategic partnerships:

• The A465 dualling project
• The Velindre cancer centre project, and
• Delivering MIM projects as part of the Sustainable Communities for Learning Programme (a type of framework for education project with the supply chain for each project to be separately competitively tendered)

The MIM incorporates a shareholding structure which ensures the Welsh Government is a key shareholder in the Project Co. In summary, the Project Co is a wholly owned subsidiary of an SPV holding company ("Hold Co"). Hold Co is owned jointly by a Welsh Government entity and private sector shareholders. Each of the private sector shareholders and the Welsh Government entity advance shareholder debt to Hold Co, which then on-loans the shareholder debt to Project Co. Shareholder return is first made as repayment of interest and principal on this shareholder debt, in order of priority as set out in financing documents – this repayment is made before distribution of profits. Under the existing MIM projects, the Welsh Government has appointed DBW Investments (MIM) Limited, part of the Development Bank of Wales Group, as its investment entity.

The MIM approach also intends to ensure the delivery of community benefits – private sector partners are obliged to help deliver the objectives of the Well-being of Future Generations (Wales) Act 2015. These objectives are categorised into four well-being domains: environmental well-being; social well-being; economic well-being and cultural well-being. The precise community benefit to be delivered through any MIM project would be tailored to that project and failure to deliver would be subject to financial and contractual remedies.

With respect to payment, the public sector pays the Project Company an "annual service payment". This payment is fixed during the procurement and provides the cost of designing, building, financing and maintaining the project, in addition to the cost of lifecycle investments over the contract period. Note that, like PFI, the annual service payment only starts to be paid once the asset is constructed and operational – it is not paid during the planning, development and construction phases.

The Regulated Asset Base Model

Typically seen as a contrasting approach to the traditional PPP model, the Regulated Asset Base ("RAB") model was initially developed in the UK in relation to utilities, such as water, gas and electricity networks. It has been used to finance infrastructure assets in the UK, including the construction of the Thames Tideway Tunnel and Heathrow Terminal 5.

The model envisages that an infrastructure manager will own, invest in and operate the relevant infrastructure asset and receives either funds from users or subsidies to fund its operations and recover its investments. An economic regulator grants a licence to the infrastructure manager specifying its rights and obligations in relation to the infrastructure asset and regulates the prices and revenues received by the infrastructure manager. 

The Regulated Asset Base is the regulator's record of the net value of the infrastructure manager's fixed assets - it allows the regulator to ensure funds received by the infrastructure manager are commensurate to the value of the assets it has funded and that these funds are distributed over the life of the assets.

The model allows investors to share operational and construction risks with consumers and helps to lower the costs of financing. For example, a charge on Thames Water's wastewater customer bills is helping to fund construction of the Thames Tideway Tunnel. 

The Nuclear Energy (Financing) Act 2022 allows for the RAB model to apply for nuclear energy projects. Where a nuclear energy company meets certain criteria, the Secretary of State can modify the terms of a nuclear energy company’s electricity licence granted by Ofgem to incorporate RAB licence terms. Licence modifications can facilitate the costs of development, construction, commissioning and operation of a nuclear plant. Consumers would be charged an amount on their electricity bills during construction of a project and a revenue-collection counterparty will channel funds between electricity suppliers and nuclear energy companies. 

Looking to the Future

Possible future structures

There has been much discussion about the form that any future PPP model will take in England. Whilst PFI has somewhat of a poor reputation in the UK, PPP is a model which is used across the world very successfully. The Association of Infrastructure Investors in Public Private Partnerships ("AIIP") and the Future Governance Forum ("FGF") have both given their views as to what a future model may look like. 

The AIIP feel that a renewed PPP model with the right changes to address the identified issues of the current model could be a vital tool for ensuring the health of the nation's infrastructure for years to come. The FGF consider the use of the RAB approach for utilities and the MIM model, both of which we discuss above. The FGF also suggests that the Government could consider the precinct model which is being used successfully in Australia.

The Australian state of Victoria developed the regional Precincts and Partnerships Programme ("rPPP") to provide funding to support precincts across regional, remote and rural Australia to deliver investment based on growing local economies, serving communities and unifying areas. A precinct is an area with a specific shared need or theme. The programme brings together governments and communities in a partnership approach to focus on delivering precincts which are tailored to local needs. The core infrastructure is used as the catalyst around which other social infrastructure and activities can be developed and allows for innovative suggestions from the private sector as to how the area can be developed.

This concept of considering all elements of a place with different organisations coming together to create novel approaches and regenerate areas with a mix of housing, offices, public facilities and other community participation seems to be key for any future PPP model. This place based approach is being used successfully in Scotland as part of their Community Placemaking programme and is a focus of new developments across the country, including for example in the regeneration of part of the centre of Stockport.

The UK infrastructure sector may gain further clarity on next steps in June this year with the anticipated publication of the UK Government's comprehensive 10 year infrastructure strategy, as announced in HM Treasury's 10 Year Infrastructure Strategy Working Paper (published 26 January 2025).

As can be seen from the variety of models above, PPPs can and will continue to be adapted and used successfully around the world to improve our public and social services. If you are interested in finding out more about the variety of models available then do get in touch.

One last thought on what comes next for PPPs in the UK, what surprised us most about the Partnerships Bulletin event was that the Procurement Act 2023, soon to become law in a mere few weeks was not discussed at all and we couldn't help but wonder whether the focus on how the public sector procures since Brexit has served as a distraction from deciding upon what to procure. In our next article we will consider how the procurement of public/private partnerships will be effected by the flexibility introduced by the new Act.