Spending watchdog issues lessons learned report for public bodies considering how to finance new public infrastructure

The National Audit Office (NAO) has issued a report outlining the lessons to be learned from more than 140 of its publications with relevance to the use of private finance for infrastructure.

The report, Lessons learned: Private finance for infrastructure, contains 12 key considerations for decision-makers grouped under three headings:

• creating the right conditions to support investor and public confidence
• making the right decisions at policy and project levels, and
• adopting a commercial strategy to deliver successful outcomes.

The NAO said that in order to create the right conditions to support investor and public confidence, public bodies “need clear objectives and a credible and consistent forward pipeline for investment”. 

It called for improvements to the level of detail and reliability of information in the pipeline, including details and value of upcoming investment opportunities.

In relation to decision-making, the report recommends that government departments develop robust business cases with clear assessments of the benefits and risks of using private finance, and mechanisms to balance cost considerations with the need for appropriate returns for investors.  

“Departments need to identify and assess risks to determine who is best placed to bear them, as not all risks can or should be transferred to the private sector because the cost of inappropriate risk transfer could be very high,” it warned.

The NAO also warned against making private finance decisions as a means to avoid accounting classifications or achieve ‘off balance sheet’ investment and the eventual costs of maintaining or upgrading assets if they are handed back by the private sector. “If costs are not accounted for properly, taxpayers will be exposed to the risks of higher public expenditure over the long term.” 

The report meanwhile suggested that government has “an opportunity to improve its understanding” of different financing models and compare their impact on the success of future infrastructure investment. 

In relation to the adoption of a commercial strategy to deliver successful outcome, the NAO noted that, to achieve this, commercial expertise was needed to undertake an efficient procurement process, supplier contracts must be managed effectively, and contingency plans should include protections and alternative options to mitigate supplier risks. 

The NAO meanwhile called for a whole life approach to using private finance for investments in public infrastructure including, planning for decommissioning an asset, extending a contract, re-procuring or taking over the operations and maintenance of an asset after contract expiry. 

Gareth Davies, head of the NAO, said: “The government has set out its ambitions for growth over the next decade. Private finance can contribute to that growth through investment, provided that important lessons are applied from different models of financing infrastructure in the UK and internationally.

“Government should take a transparent approach to assessing the role of private finance in major investments, showing how value for money for taxpayers will be achieved alongside appropriate returns for investors.”

The Infrastructure and Projects Authority’s (IPA) latest National Infrastructure and Construction Pipeline, published in February 2024, has identified around £1 trillion of potential capital investment over the coming decades.