Central government could increase its appetite for PFI schemes as departments once more look to long-term contracts, according to Infrastructure UK’s chief executive.
Geoffrey Spence told Construction News the government’s ambition to run a budget surplus would eventually lead to a relaxation in departmental spending restrictions.
The Office for Budget Responsibility is forecasting a budget surplus of £10bn in 2019/20, an ambition the prime minister David Cameron reiterated at the CBI’s annual conference yesterday.
Mr Spence said: “The government has already said it wants to get to a surplus. That’s the end, if you like, of fiscal consolidation in terms of getting the deficit down, which has been the great task over the last few years.
“I think it’s possible for departments to think about long-term contracts in a way which frankly I think was difficult over even the last 10 years… to enter into longer-term fixed obligations for some social infrastructure.”
Mr Spence, who in recent years has argued investors should look at economic infrastructure rather than seeking PFI projects, said that while an increased appetite for private finance schemes wouldn’t happen overnight, the market could start to think about them again.
PF2 has so far been used to procure batches of schools with contractors such as Interserve and Miller Construction (now part of Galliford Try) worth around £540m under the Priority School Building Programme in Herts, Luton and Reading, the North-west, North-east and Midlands.
A further two projects are due to reach financial close before Christmas: Laing O’Rourke’s Yorkshire batch of priority schools (c£125m) and a Carillion joint venture’s Midland Metropolitan Hospital for the Sandwell and West Birmingham Hospitals NHS Trust (c£340m).
Mr Spence said: “My message over the last four years at conferences was: look guys, stop trying to do PFI, go on and do economic infrastructure… to say to the market, there was a love affair with PFI that lasted a bit longer than was in their commercial interests and they needed to focus on other opportunities, which indeed they have.
“We’re not sure at the moment what’s going to happen, but it’s possible that we’ll do more [PFI] than we thought, or than we’ve indicated previously.
“Watch this space over the next few months, we’ll see what happens in the spending review and there could be more of this relative to what we’ve seen over the last few years.”
Mr Spence was one of several high-profile industry leaders to speak at the Summit of increased client appetite for contractors having greater in-house expertise.
HS2 chief executive Simon Kirby and Laing O’Rourke CEO Anna Stewart both offered their support for greater design expertise, echoing Sir John Armitt’s comments in his inaugural address as ICE president.
On skills, Mr Spence said: “I think there’s a problem in construction and the industry knows it’s a problem. We’ve discussed it at the Construction Leadership Council about the diversity and age profile issue.
“Maybe some construction companies have to look at their business models and realise they need to do more in-house than they did before.
“We think that would be a good thing. It’s something that more European companies have successfully done and they have a higher margin in their business than we have here in the UK.
“Undoubtedly a problem here is the margin doesn’t give a lot of money to invest in [skills]. It’s a matter for the private sector to sort out with help from government.”
Meanwhile Mr Spence said there were no plans for the new National Infrastructure Commission chaired by Lord Adonis to supersede Infrastructure UK.
Speaking in February before the general election, Sir John Armitt had said Infrastructure UK would be merged with and eventually superseded by Labour’s proposed commission.
Sir John now sits as one of the eight commissioners on the NIC, launched by the chancellor earlier this month.
But Mr Spence said there was a misconception about the nature of the work IUK does and that its staff would help to establish the NIC and would work with it as the two bodies complement each other.
“Sir John and Lord Adonis’s thoughts might have been that IUK has been doing long-term work for the government and that work has to feed in to the NIC and they’re right. But that’s not really what IUK does.
“Most of what IUK does is improve the effectiveness of government in delivery, whether helping Defra negotiate commercial terms on the Thames Tideway Tunnel or Hinkley Point C [or] social infrastructure through PF2.
“There is some overlap where we’ll have to work together but it’s complementary… we support it, don’t see it as a threat, we think it’s a good thing.”