Source · Select Committees · Public Accounts Committee
Recommendation 5
5
Accepted
Develop an infrastructure financing toolkit for quantifying and managing public project risks
Conclusion
There is no comprehensive framework for considering risk allocation between the public and private sector when working in partnership. Risks should be borne by those who are best able to manage them and should be priced appropriately. Not all risks can or should be transferred to the private sector because the cost of inappropriate transfer of certain project risks to the private sector could be disproportionately high, as ultimately, the government may have to pick up those risks, including the completion of projects if the private sector partner fails or is unable to deliver to the requirement. The lack of guidance in quantifying risk as seen for PFI contracts helped to fuel some misalignment between the additional costs of PFI, private sector return on investment (which was considered 5 disproportionately high) and the actual level of risk incurred. The Treasury says that the benefit of private finance includes the incentive for more risk management within the private sector. However, we heard that sometimes there is a misplaced belief that risk transfer to the private sector equates to risk management by the private sector, and therefore there is a false assurance that the problem lies elsewhere. This is not always the case, as ultimately the government may need to step in if a major supplier of critical infrastructure were to fail, as was the case for Carillion. recommendation The Treasury should develop a specific infrastructure financing toolkit to support public bodies in quantifying, allocating, monitoring, and managing risks for infrastructure projects. This should include the consideration of contingencies for supplier failure.
Government Response Summary
The government committed to the Treasury and NISTA setting out further guidance by May 2026 regarding contract and performance management, and how to reset infrastructure projects, complementing existing guidance.
Government Response
Accepted
HM Government
Accepted
The government agrees with the Committee’s recommendation. manage risks – and structuring contracts to reliably incentivise and capture that expertise – is key to private finance projects being able to demonstrate value for money. Where risks are better managed by the private sector, it is important to carefully consider how contractual provisions can best ensure robust risk management throughout the asset’s lifecycle. However, supplier failure remains a risk in any contractual situation. Although robust due diligence and contractual provisions can reduce these risks and mitigate their impacts, some degree of counterparty risk is inevitable. Some risks are better managed by the public sector, and it is poor value for money to attempt to transfer these. Contracting authorities should consider the overall package of risks and returns to assess whether a financing model offers good value for money compared to alternative financing options. In implementing the 10 Year Infrastructure Strategy, the Treasury and NISTA will carefully consider the risk allocation in infrastructure procurement, and the involvement of private capital in taking risk in different elements of financing structures, to ensure value for money is achieved. The government has learned the lessons from the past and is applying these learnings to current and future projects. For example, the lessons learned from Hinkley Point C helped lead to Sizewell C’s pioneering use of a Regulated Asset Base model to more effectively allocate risk between the parties and which enabled the conclusion of a private equity raise. NISTA offers expert advice to public bodies contracting private finance deals for infrastructure, and further support and guidance is available from the government’s Risk Centre of Excellence, including the Orange Book, and the Cabinet Office. The Treasury and NISTA will set out further guidance by May 2026 regarding contract and performance management as well as how to reset infrastructure projects, complementing existing guidance such as Navigating the risks of PFI project distress (GOV.UK).