Life after PFI – Future investment trends for infrastructure projects
In the autumn edition of Infra.Law, I suggested there were potentially three key impacts of Brexit on the construction industry, one of which was the UK’s approach on infrastructure investment following its likely changing relationship with the European Investment Bank.
Since that article, Brexit has continued to dominate the political landscape but there have been some recent announcements and developments by industry groups and the government which suggest that there is a recognition that infrastructure investment is at somewhat of a crossroads.
Infrastructure investment strategy
In conjunction with the Spring Statement, the government launched a consultation on private infrastructure investment. The consultation closes in June and, according to the consultation document, it is the government’s intention to publish a comprehensive National Infrastructure Strategy later this year. This strategy is said to be “the first of its kind” and despite the ‘Goodbye PFI’ announcement by the Chancellor in last year’s budget, private investment in alternative investment models will be key.
The Infrastructure Pipeline and new models
The Analysis of the National Infrastructure and Construction Pipeline, dated November 2018 by the Infrastructure and Projects Authority (IPA), identifies over £600 billion of projected public and private sector investment into UK infrastructure over the next 10 years. The report also confirms publication of the government’s National Infrastructure Strategy in 2019 and the need to keep pace with technological change to raise productivity and support long-term economic growth.
Contracts for Difference, the Regulated Asset Base Model, and the UK Guarantees Scheme are described by the IPA as tools for the delivery of projects through private investment, in lieu of PFI. Although these models are mentioned only in passing, the IPA states that the Regulated Asset Base Model (RAB) is being considered as the financing model for future new nuclear projects and some utilities. The Department for Business, Energy and Industrial Strategy’s Policy Paper on Contracts for Difference (CfD), January 2019, describes CfD as the government’s main mechanism for supporting low-carbon electricity generation. Eligible UK renewable generators can apply for a CfD by competing for a contract based on a form of ‘sealed bid’. In contrast, the UK Guarantees scheme is not aimed at particular industries, but a wide range of infrastructure projects provided they meet the ‘nationally significant’ criterion.
Lucky number 13?
Project 13 is a procurement initiative that has been proposed as a solution by the Infrastructure Client Group (ICG), a forum for major infrastructure clients “to work collaboratively to understand best practice”. The Institution of Civil Engineers (ICE), who launched Project 13, describe it as a new, industry-led enterprise model that seeks to “boost certainty and productivity in delivery, improve whole life outcomes in operation and support a more sustainable, innovative, highly skilled industry.” The ICE cites projects such as the Anglian Water capital delivery alliances, Heathrow Airport expansion and National Grid’s London power tunnels as “early adopters beginning to implement the Project 13 approach”.
ICE’s P13 Blueprint sets out the roles and responsibilities of stakeholders in the model. Key suppliers and advisors have direct relationships with the owner, which is likely to push risk up, rather than down, as it places the owner in a central role. The owner engages an ‘Integrator’ who engages and integrates all the parties such that they work as a team with a common goal that jointly mitigates risk rather than transferring it. The team is driven by reward based on value added to project outcomes, rather than on day-to-day services provided and work performed.
Crucial to the success of this model is early engagement and design, and a holistic approach to construction combining a diverse range of skills and services. This ‘partnership’ approach is not partnering by another name. However, it is likely to work best where the parties can build trust based on longer-term relationships and benefit from the efficiencies of a 5-year framework versus a shorter one, for example.
By themselves, these investment models will not make the construction industry any more productive or address the potential skills shortage, which may hamper the success of future infrastructure projects. Investment by the private and public sector is also required in technology and new construction techniques.
The private sector has been making advances with investment into areas such as design for manufacture and assembly, drones, augmented and virtual reality. The Government’s announcement of a new £72million Core Innovation Hub, for investment into research and development for digital design, advanced manufacturing, robotics, drones and augmented and virtual reality, will build on the private sector’s investment in these areas.
The cost of investment in these new technologies is undoubtedly a hurdle, but they are also key to the success of infrastructure projects and investment models in the UK.
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Welcome to our summer edition of Construct.Law bringing your legal and commercial insight into issues facing the construction industry.