RICS: The UK needs PPP ‘boost’

Private-Public Partnerships (PPPs) have become the most credible source of capital capable of bridging the UK’s shortfall in infrastructure investment, according to a new study.

According to the Royal Institute of Chartered Surveyors (RICS), the pressure faced by Western governments to reduce deficits while continuing to deliver essential services to citizens and businesses has created a ‘global infrastructure challenge’, with industry insiders and politicians grappling with the imperative of finding alternative financing.

This has been compounded by the impact of post-financial crisis regulation, such as the Basel III and Solvency II frameworks, which have restrained banks’ ability to play their traditional role as purveyor of financing and further clouded the environment for infrastructure lending.

RICS thinks this has created a strong rationale behind further efforts to develop PPPs in the UK. “It is vital that investment in infrastructure is increased to ensure the UK remains competitive and continues to attract multi-national corporations,” said Clare Eriksson, director of global research & policy at RICS, in a statement.

Figures compiled by RICS showed that the country’s ‘infrastructure gap’ – the difference between investment needs and actual spending – could be worth up to £500 million (€588 million; $802 million) per annum.

“This research supports PPP as a viable solution to the UK’s current infrastructure investment deficit and we at RICS call for the government to raise awareness of the opportunities infrastructure presents as an asset class,” Eriksson said.

The research body admitted that there remained a debate about whether PPPs actually did represent value for money for the taxpayer. That was complicated by the fact that there was no single, unified definition of the term PPP as well as a lack of benchmarks to evaluate them.

RICS thus called for the development of a performance index for unlisted infrastructure funds – capable of shedding light on the different risk-return strategies co-habiting in the asset class – and the generation of greater activity in the secondary market, thereby creating additional and earlier exit opportunities for contractors.

Other proposals contained in the report include a requirement to improve the use of existing infrastructure, in order to correct today’s bias towards new build projects; the adoption of new technologies to more efficiently manage infrastructure; and a more systematic approach to infrastructure provision by the UK government, which would see a robust commitment to infrastructure development through the ‘ring fencing’ of investment levels as a percentage of GDP.

The study painted a positive picture of the progress of the UK PPP market to date, with the government remaining both committed to partnership-based procurement and aware of the need for reforms to restore public confidence in the model. In particular, it said, more details were needed on the exact equity structuring of PPP deals and disclosure requirements for private shareholders pertaining to the new Private Finance Initiative (PF2).

Recent announcements by the government that the treasury would take minority stakes in PF2 projects have received mixed reactions from the private sector, with investors potentially reluctant to take development risk only to then see their stake significantly diluted.