Worldwide UK blueprint for infrastructure

Established in the early-1990s under the John Major Government, the UK’s Private Finance Initiative was the first systematic programme for the development of infrastructure projects under a public-private partnership (PPP). It was introduced as a way of bringing in private sector capital to fund major infrastructure projects. The underlying principles of the PPP model are threefold – private sector delivery, private financing and long-term asset management.

The UK model for development suffered intense public scrutiny over its cost effectiveness and value for money for the taxpayer, and in 2012 underwent a review, resulting in a new approach to PPPs. The subsequent Public Finance 2 model attempted to address these issues by offering greater transparency, more efficient project delivery and a higher public sector equity share in projects. But despite its negative press, the UK PPP model continues to act as a blueprint for the development of infrastructure across the world.

Darryl Murphy, partner, global infrastructure practice, KPMG, says: “There has been an evolution of PPP internationally. A decade ago there were between six to ten countries doing PPP projects, now there are over 100 developing their own models.” According to IJGlobal, 107 new PPP projects, across 28 different countries, secured financing in 2013 and there are a further 460 in procurement.

Canada was one of the first countries to adopt the UK PPP model in the 1990s and now has a well-established PPP market of its own. According to the Canadian Council for Public-Private Partnerships, as of June 2013, there were 102 operational PPP projects in Canada and 54 under construction. A further 41 PPP projects are also in the procurement stage.

KPMG’s Mr Murphy worked on one of the first hospital PPPs in Canada, the William Osler Hospital in Ontario, and he recalls that the hospital board and its legal advisers looked to the UK model for guidance. “They literally printed off a copy of the UK standard form contract as a reference point,” he says.

In both contexts, the PPP model has helped to reduce the cost of developing infrastructure for the public sector. The objective of the model is to ensure greater cost-savings and greater service to the taxpayer, says Gershon Cohen, head of a multi-billion-pound infrastructure fund business, which was recently acquired by Aberdeen Asset Management. “It offers a low cost of capital for the development of infrastructure and it transfers the risk to those best able to manage it,” he says.

In addition, the PPP model encourages the public sector to consider the entire life-cycle costs of a particular asset and this is extremely valuable when determining value for the taxpayer over the lifetime of the asset.

On the surface the UK model has proved transferable, at least to countries with a similar culture and legal framework. But as more countries look to establish a PPP framework, it is increasingly evident that there is a no one-size-fits-all model.

PPP is a hybrid relationship between the public and private sectors with each market looking to develop PPP through its own lens, says Mr Cohen.

“They [foreign governments] will look favourably at the UK model, but they won’t be able to implant it entirely in the UK way. Instead they will adapt it to the way that fits their culture. Countries that have developed the PPP model have taken the underlying principle of long-term asset management and private sector involvement to develop infrastructure.”

For example, India is a country in which the PPP model is applied to almost all infrastructure development from roads, and rail to power, water, schools and hospitals. The Indian legal system is based on English law and so provides a good basis for PPP contracts. But the PPP model in India is slightly different to that in the UK.

India has huge requirements for infrastructure spending with the Indian government’s twelfth five-year plan estimating the need for infrastructure expenditure of $1 trillion. Around 50 per cent of this amount is expected to come from the private sector. There are currently 48 PPP projects in procurement in India.

The influence of the UK model remains really important – many countries look to the UK as a guide for infrastructure delivery

Unlike in the UK and Canada, there is no central PPP unit in India. Instead PPPs are run independently by each state. “A central PPP unit would not work in a big country like India; it would create a bottleneck in delivery of projects,” says Vijay Pattabhiraman, chief investment officer of Asian infrastructure, J.P. Morgan Asset Management.

The PPP model has worked extremely well in the roads sector in India and the country’s road programme is often cited as one of the best PPP programmes in Asia. “The National Highways Authority of India was the poster child of PPP in Asia,” says Mr Pattabhiraman.

But in the last seven to eight years, the Indian PPP system has been marred with corruption, and poor execution of projects has damaged the system and deterred investors. “There are land acquisition issues and new projects have suffered delays. The market context in India has led the PPP model to break down,” he says.

For the PPP model to thrive, you need a strong private sector and a strong public sector. The private sector can create systems and can ensure consistency and timelines of project delivery, but it cannot create the environment for investment. “The PPP model works well where the government is willing to accommodate it,” says Mr Pattabhiraman.

Corruption and political risk is also a factor that affects other emerging PPP markets. KPMG is advising governments in Africa, where Mr Murphy says we will see the development of a large PPP market over the next five years or so. The culture is very different in this region, coupled with increased political risk in some countries, so it will be difficult for a mirror image of the UK PPP model to develop, he says.

But those African governments that have been exploring the use of the PPP model to develop infrastructure, such as Ghana, Kenya and Nigeria, are looking to the UK as a guide.

Mr Murphy adds: “We are talking to the government in Ghana about the development of PPP and we say to them, if you want to develop a PPP model of delivery for your infrastructure then South Africa may offer some guidance, but they are keen to learn from the UK, even if the markets and challenges are, in fact, entirely different.

“The influence of the UK model remains really important – many countries look to the UK as a guide for infrastructure delivery.”

As the world moves towards global standardisation, we will continually see countries borrowing from one another in terms of frameworks and practices. But standardisation in infrastructure delivery is unlikely as this stifles innovation and ultimately stymies flexibility. Instead we are likely to see the principles of private sector delivery and asset management founded in the UK adapted and adopted across the world.