The shake-up of the private finance initiative could end its bundled contract approach, opening up the market to smaller contractors and achieving better value for the taxpayer.
Geoffrey Spence, chief executive of Infrastructure UK – the body tasked with looking into solutions for £200 billion of infrastructure investment and assessing the value of PFI – talked about potential changes while defending contractors this week.
His comments were made to MPs on the public accounts committee, which scrutinises government spending. It this week questioned high equity returns and called the market an “oligopoly” dominated by the “usual suspects”.
Committee member Richard Bacon suggested risk was “vanishingly small” for seasoned contractors, who overcome the high barriers to entry to the market, dominate the schools, hospitals and prisons sectors and reap the financial rewards.
Mr Spence dismissed the word oligopoly, saying: “People are killing each other to win these contracts.”
He added: “The reason they participate in it, if you are a Carillion or a Balfour Beatty, is you want a major share of the UK construction market… If there are two or three of them competing with each other for these contracts they will compete very aggressively.”
He said any large projects will need to be covered by the balance sheets and workforces that can manage them, but added: “It may be possible competition can increase, simply by changing the mix of what services we provide with these contracts because it’s easier therefore for other companies, maybe smaller companies, to actually participate in the services contract by competing outside the PFI envelope.”
PFI sees the finance, design, build, operation and maintenance carried out by a private consortia, then paid back by the public sector over 25-30 years. Treasury is currently looking at ways to improve the model.
Carillion Private Finance managing director Robin Herzberg told the committee: “I think one of the problems is the structure of the NHS. I don’t think it’s efficient to actually have a trust laying such a large proportion of its income on a single contract.”
The hearing followed a National Audit Office report calling for the government to consider alternatives to limit high investor returns in relation to risk.
Nigel Middleton, managing director of Barclays Infrastructure Fund, told the MPs that capping would prove a “strong disincentive” to investors, many of whom are pension funds.
However, he and Mr Herzberg conceded a profit share arrangement could work.