Source · Select Committees · Public Accounts Committee
Recommendation 23
23
Accepted
Treasury prioritises private finance for incentivised risk management and expert due diligence.
Conclusion
We asked the Treasury how it decides on which private finance model to use, and how it assesses the additional cost of private finance against the benefits of risk transfer. The Treasury told us that the benefit of private finance is that the private sector is incentivised to take on and manage risk. It explained that the private sector performs more front-end due diligence on projects because it tends to have access to more skilled and experienced people for delivery of these projects, which can lead to better performance and outcomes. The Treasury added that the returns that the private sector receives is determined by their assessment of the risk in the contract and the difficulty of delivering it, and so the private sector is incentivised to give the best price for both finance and the delivery contractor.53 The Treasury highlighted that when deciding whether to choose private or public finance, the Green Book dictates that the risk that the public sector is retaining should be considered, even if public financing is cheaper.54
Government Response Summary
The government agrees with the committee's observation regarding private finance models and risk assessment. The Treasury and NISTA commit to publishing further guidance by May 2026 on contract and performance management, as well as how to reset 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).