Source · Select Committees · Public Accounts Committee
Recommendation 22
22
Accepted
Inappropriate risk transfer to private sector incurs disproportionately high costs for government.
Recommendation
There are many risks to delivering major infrastructure projects, such as financing risk, construction risk, and demand for the asset being lower than expected.49 These risks should be transferred to those best able to manage them, and when they are transferred to the private sector, it comes with costs: it is fair that the higher the risk, the higher the return.50 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 completion of projects, if the private sector partner fails or is unable to deliver to the requirement. A lack of 44 Qq 10-11 and 33; C&AG’s Report, para 2.17 and 2.20-2.21 45 Qq 3, 11-13 and 73 46 Qq 32-33 47 Qq 32 and 68-69 48 Q 32 49 C&AG’s Report, para 3.2; Committee of Public Accounts, Private Finance Initiatives, Forty-Sixth Report of Session 2017–19, HC 894, June 2018, p 13 50 C&AG’s Report, para 3.16; C&AG’s Report, Equity investment in privately financed projects, Session 2010–12, HC 1792, February 2012, p.11; Committee of Public Accounts, Private Finance Initiatives, Forty-Sixth Report of Session 2017–19, HC 894, June 2018, p 17 15 guidance in quantifying risk for PFI schemes, for instance, helped to fuel some misalignment between the additional costs of PFI, the private sector’s return on investment (which was considered disproportionately high), and the actual level of risk incurred.51 For some other types of financing models, the government sought to ensure that excessive risk did not deter private investment, such as in the case of the Carbon Capture, Usage and Storage (CCUS) programme. The private sector invested significantly in CCUS after the Department for Energy Security and Net Zero applied lessons learned from previous failed attempts to launch CCUS in the UK and created business models that allocated costs and risks effectivel
Government Response Summary
The government agrees to improve risk management and transfer, with a target date of May 2026, by committing to issue further guidance on contract and performance management and resetting infrastructure projects.
Government Response
Accepted
HM Government
Accepted
5.1 The government agrees with the Committee’s recommendation. Target implementation date: May 2026 5.2 Identifying where the private sector is better placed to identify, assess, price and 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. 5.3 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. 5.4 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. 5.5 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. 5.6 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. 5.7 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).