Rob Hann discusses the lessons to be learned from Local Government Investment Programmes and the UK investment bank.
My local government career in law has been a little unorthodox perhaps, in that for nearly 20 years of my 37-year (and counting) career I worked for an organisation placed right at the centre of local government and which was (initially at least) established to help the roll out of the PFI investment programme across all local government sectors and services in England and Wales. Of course, there are no new PFI schemes being approved or funded nowadays, and we only hear about PFI in the context of those remaining operational long-term contracts which have, by now (or are shortly to) run to full term or else have, otherwise been terminated early for various reasons.
Yet the PFI was and remains the largest (in terms of capex) and most comprehensive (in terms of services, sectors and assets delivered) investment programme ever undertaken across local government. Its legacy is all around us in terms of school buildings, tram networks, waste management facilities and other public infrastructure created and delivered through the PFI processes and funding provided by successive Governments from 1996 to 2015.
It is also undoubtedly true that PFI has had a bad press and some of that criticism is justified. PFI was a huge learning curve for everyone involved and it suffered from being ‘the only game in town’ for the funding of new LA projects for the 20 years or so of its existence.
However, if we look behind the PFI label and focus on what was achieved under the local government PFI programme, there is a significant amount of good practice and good processes to learn lessons from and to bring to any new investment programme which might be contemplating lending millions of pounds across the local government spectrum to rebuild local economies blighted by the Covid 19 pandemic. Is such a programme about to be launched?
I was prompted to write this piece following recent government announcements about the establishment of the new UK Infrastructure Bank (‘the UIB’) and its proposed role in local government. I thought it might be a good time to take stock of what worked best under the last major investment initiative (the PFI) to see if any learning from that programme can be salvaged and recycled to good effect?
First, a word about the new bank and its proposed role:
The UIB was set up earlier this year to replace the European Investment Bank, which prior to Brexit, had been a major funder of UK infrastructure projects and programmes (such as Cross-rail and the Greater Manchester Tram network) and which offered up much needed capital funding to both central and local government sponsored capital intensive projects. The UIB looks set to play a key role in future with providing funding for similar schemes to the local government sector (amongst other public bodies competing for scarce funds) and projects aimed at reducing harmful co2 emissions, improving and retrofitting public buildings to make them more energy efficient and rolling out more electric vehicle charging points across the regions to help motorists to make the shift to EV’s.
It is reported that the UIB plans to set up a local authority advisory function that will provide local authorities with ‘oversight skills and assurance’ around what the local authorities are doing and intend to do. The UIB is beginning to promote its own ‘USP’ which it hopes will ‘encourage’ local authorities to choose the UIB as its ‘go-to’ funder of first resort, over other possible and hitherto available options such as the Public Works Loans Board (‘PWLB’). Its USP is that the UIB will offer to arrange loans to local authorities at a rate of 20 basis points cheaper than even the PWLB can muster.
However, (and here comes the ‘sting in the tail’), HM Treasury have concerns about some local authorities who have speculated on the property market primarily to generate income. Whilst some authorities may have prospered from out-of-area commercial property acquisitions, others have reportedly lost significant sums, particularly given the havoc Covid 19 caused with lockdowns of shopping centres, leisure facilities and many other (formerly) income generating facilities over the past 2 years. HMT’s fear is that the full impact of the pandemic’s impact on these investments has yet to fully work its way through the local government sector but already there have been some high-profile examples of financial mismanagement in local government which have ‘spooked’ HMT into action. CIPFA guidance now curbs LA enthusiasm for acquiring property and land purely in search of profit or yield (rather than for regeneration or development purposes).
The UIB, it seems, is also being set up, in part, to police (or at least to thoroughly vet) LA proposals to borrow large sums to fund regeneration and other eco projects. To secure funding the UIB will seek evidence that LA projects are financially viable and will explore whether and how the LA applicant is or will be in a position to repay its loan obligations. Whilst LA’s remain free to explore lending from the PWLB such lending will be at 20 higher basis points than a loan secured from the UIB and so it will not look like value for money to local tax payers or to auditors concerned with prudent LA financial management if such funds are accessed elsewhere and will cost more (such as via the PWLB). The full range of investments to come within the UIB’s remit have yet to be announced but projects and programmes aimed at net zero compliance, reducing carbon emissions, and boosting sustainable economic growth are most likely to be well up the list of schemes potentially in line to seek access to UIB investment.
Whilst the UIB seems on one level to be doing nothing more than any prudent lender, the new loan facility as described, and the vetting role in particular, might not be so attractive to local authorities and may have the effect of putting off LA initiative rather than fostering and encouraging plans and proposals to rebuild local economies. However, for me the processes described don’t go far enough. The ‘due diligence’ involved in assessing applications for funding, on the face of it and from what has been put out in the press to date, seem to be solely focused on financial issues and the LA’s ability to repay loans, as opposed to the wider deliverability of the project, the state of the market and the market’s ability to deliver goods, services and supplies post-Brexit.
So, what lessons might be learned from the PFI to make the new UIB funding process become more attractive to the local government sector and help such projects progress through a pipeline, into market and then into successful delivery?
Here are some pluses from PFI that could be plugged in here:
Firstly, the removal of legal obstacles to the PFI such as the ultra vires doctrine through the process of certification (via the Local Government (Contracts) Act 1997) proved to be the starting gun for the PFI across local government. From this point on, third party funders and contractors were provided with confidence to deal with local authorities via long term contracts. The 1997 Act though was never exclusively tailored for PFI. It in fact, applies to contracts for services over 5 years duration, so there is no reason why these provisions cannot be used to help the next generation of major LA infrastructure projects.
Secondly, the process for securing a promise of PFI funding for the duration of a contract (known as PFI credits and then later – PFI grant) gave the market confidence that any major project approved by the central committee of senior civil servants (known as the project review group or PRG) following full 5-stage business case submission by the relevant LA was both affordable from the LA’s perspective and deliverable in terms of fully worked through proposals signed off both by the LA and central government; Perhaps something similar could be put in place which tests deliverability of the project rather than simply ‘can the LA pay the money back if the project fails’?
Finally, the standardisation of PFI contracts (‘SOPC’), the standardisation of competitive dialogue processes, the establishment of model form sector specific and HMT mandated public sector contract conditions were hugely successful in ensuring continued and effective deal flow as well as holding a line on certain commercially sensitive issues pan-public sector. It is unfortunate (but given the demise of PFI not surprising) that there has been no update to SOPC since version 4 in 2007 but, going forward, it seems sensible to start from these market tested provisions to develop a new generation of standardised contractual clauses fit for a post Covid 21st century investment programme of the type envisaged by the UIB. But who has the authority, remit and funding to undertake this important role nowadays for the local government sector?
I sincerely hope the UIB can find a way to work with local and central government partners and provide essential funding for an investment programme spanning the whole range of local government services and to meet the significant challenges we face both in terms of the Covid recovery but also, as regards local government’s response to the climate change agenda and net zero. Building on the legacy and lessons of past major investment programmes might help speed this up and prevent wheel reinvention.
Rob Hann is Head of Local Government at Sharpe Pritchard LLP.
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