For PFI to thrive the culture has to change
The UK is facing the complex challenge of ensuring there is sufficient investment in infrastructure to keep pace with social, economic and technological changes and needs. On July 10, the National Infrastructure Commission launched the national infrastructure assessment. The assessment makes a series of recommendations, including a switch to low-carbon and renewable sources for power and heating; nationwide broadband plan; and a move towards electric vehicles.
With the commission stressing its recommendations are not “an unaffordable wish list” for the Government, the private sector features heavily in the long-term delivery and investment plan. However, despite the centrality of private finance to the provision of public services, the sector faces an unprecedented lack of trust.
One issue that has influenced the fluctuating stance and policy of government is the long-term nature of infrastructure projects, which often sit uncomfortably within a short political cycle. Ministries charged with providing funding and oversight are often different to the ones who approve projects. Furthermore, mega-projects and services that directly impact local communities regularly become hot-button topics for opposition parties to contrast their economic and ideological positions.
In this context, Conservative ministers, select committees and the current Labour opposition have all felt compelled to look at how private finance operates, with Labour calling for the termination of private finance initiative (PFI) and public private partnership contracts, and the nationalisation of privately owned utilities. The demise of Carillion has only intensified the scrutiny around placing essential public projects in the hands of the private sector.
Private investors and operators have also scored a series of own goals with how they price and structure contracts. Every headline of a school or hospital being closed under the weight of inflexible PFI payments cements the perception that the public are being “ripped off ”.
Traditionally, private operators of infrastructure and public services have emphasised their environmental credentials as the primary measure of their responsible practices. Similar importance has not been given to the governance of their operations.
However, good governance is essential in delivering long-term value. For businesses to remain sustainable and flourish, they must acknowledge their role in the broader environment in which they operate, and develop positive relations with customers, government agencies, suppliers, employees and communities.
The revisions to the UK corporate governance code, which emphasise social purpose, culture and stakeholder relations as foundational principles, are welcome. While the code is directed towards public companies, lessons from the collapse of BHS have already resulted in demands to raise governance standards in private companies.
Other trends will inevitably have an impact, including calls for a fairer distribution of value and wealth, and the rise of environmental, social and governance (ESG) investing. In due course, the myopic pursuit of maximising short-term profits at the expense of “stakeholder value” will likely result in business failure, while companies unable to demonstrate strong ESG credentials will be starved of capital or be required to pay a substantial premium to access it.
Although the threat of hard and soft regulation looms, private players have an opportunity to shape reform. Restoring trust will require industry leaders to set clearer standards; to create a culture that puts public interest at the top of the agenda; and to engage with stakeholders in an honest, transparent and responsive manner.
One way to demonstrate commitment to change would be the development of a voluntary code of conduct to address the key issues. The credibility of the code would require the establishment of an oversight committee that monitors compliance and can demonstrate meaningful behavioural change.
The private sector must show itself capable of acting swiftly, decisively and responsibly in redefining its mission statement, culture and conduct. This would help shift the narrative of the dynamics of private capital and public interest projects from a zero-sum game to an essential and mutually beneficial partnership for all stakeholders.
‘Good governance is essential in delivering long-term value for all stakeholders’