By Suzannah.Brecknell

25 Jan 2012

With infrastructure development a key plank of the government’s growth strategy, the Treasury’s investment team Infrastructure UK has an ever-more important role to play. Suzannah Brecknell meets its chief, Geoffrey Spence.

Things cost more in the UK: our food and diesel prices are the highest in Europe, according to a recent study by price comparison website uSwitch. And it’s not just consumables that cost more here: a 2007 study by pan-European road managers association CEDR suggested that highway building projects in the UK were among the most expensive in Europe, while a 2009 study into the costs of high-speed rail projects found that High Speed 1 – the UK’s only completed high speed line – was significantly pricier than comparable projects in France and Germany.

“Infrastructure generally looks as though it’s more expensive here, and not because [material] costs are higher, but because the way we do it, both in the public and the private sector, is not optimised to get the best cost,” says Geoffrey Spence, chief executive of Infrastructure UK (IUK) – the 60-strong Treasury team charged with helping government to support investment in infrastructure across the country.

Having spent most of his career working in the finance sector, followed by a number of years in the Treasury – both as a civil servant, and as an adviser to former chancellor Alistair Darling – Spence is ideally placed to help improve the way public and private sectors work together. This role is especially crucial given the emphasis chancellor George Osborne placed on infrastructure investment as a driver for growth in his Autumn Statement last year. In the statement, Osborne committed £10bn of public funding to a number of key infrastructure projects (half in this spending review period, to be funded from savings found elsewhere, and half in the next spending review period) and published a National Infrastructure Plan (NIP) which set out £250bn of future public and private investment. Government, said the NIP, will be taking a “fundamentally new approach to co-ordinating public and private investment in UK infrastructure”.

Strategy to cut costs
So why do our roads and railways cost more than those in other countries? In 2010, an IUK cost review estimated that the UK could save £2-3bn a year by reducing the cost of infrastructure programmes. It identified a number of reasons for high infrastructure costs, including a “stop-start investment programme” with weak forward planning; poor management of large projects and programmes; poor procurement processes in the public sector; and a lack of strategic planning or investment from companies in the supply chain.

An implementation plan followed, in which IUK said it would work with key delivery departments to improve work planning and funding cycles; publish a common set of principles for risk-management mechanisms; develop a model competition and procurement process (in partnership with the Cabinet Office’s Efficiency and Reform Group, plus the highways and environment agencies); and publish a checklist of key success factors for big infrastructure projects (in partnership with Major Projects Authority).

Some elements of this work are already in progress, but what has been the biggest achievement so far in the implementation process? Spence is a little reluctant to comment on specifics, citing a closed session scheduled for February to discuss progress with private and public sector stakeholders, and a subsequent report due to be published in March. “I don’t want to pre-empt that in terms of some of the detail,” he says, but he suggests that “the best thing” they have achieved is to publish a pipeline of publicly-funded projects, which appeared alongside the NIP and Autumn Statement last year.

Pipelines, corridors and tunnels
This pipeline provides a “three-year look forward at contracts that the government is going to let”, covering about 500 projects – 40 of which were identified as high priority, and will be subject to particularly close ministerial scrutiny (improving delivery of major projects was another priority set out in the NIP – see article for more on this).

Publishing the pipeline has various benefits, says Spence. The private sector “get visibility as to where the government’s going to invest over the longer term, and therefore they get a clear picture of what skills they should invest in ahead of the bid, to win those contracts.” Helping suppliers to be more efficient in their bidding and strategic in their investment, he adds, means “they also serve the public client well, because they’re probably able in the end to offer a lower price or a better product.”

While private companies may focus on the skills and investment needed in their own field of work, IUK will also use the pipeline to look across different areas for potential synergies between projects and programmes. For example, says Spence, two large tunnels will soon be dug under London: one for Crossrail, and the other a massive sewerage upgrade as part of the Thames Tideway scheme. These will require similar skills, as will the recently-approved High Speed 2 rail project. Already “there is some progress on that because there is a skills academy being created in Hackney to service both those major tunnels,” he says, and IUK will be working to ensure there is continuity between these projects so that “the skills that are developed for Crossrail are carried over into those other two projects”. IUK, he adds, will ensure that tunnelling schedules are co-ordinated as much as possible. Spence describes this as a process of facilitation between the three projects. “We’ll make sure they’re talking to each other: if they’re not, obviously we’ll apply some pressure to make sure we’ve got those interfaces,” he says.

His team also looks out for “interdependences” between projects. So if one project is creating a corridor, “say, up to Birmingham”, the team will investigate whether other utilities – such as broadband providers – could take advantage of the building work, producing savings for both sides. This can be “very complicated, because of the silo effect of government – but also the silo effect of the private sector”, says Spence: while government departments protect their own bits of infrastructure, private companies instinctively guard their own commercial interests. IUK, therefore, hopes to add a “more collective viewpoint” about shared interests, and then facilitate discussion between departments and private sector partners to encourage “those different points of view into a common understanding that would benefit [all parties] to maybe develop things differently.”

New funding models
Spence often emphasises that both the public and private sectors will need to change the way they work if the UK is to get better value from its infrastructure investments, and he says that another big achievement of IUK’s work so far has been “the private sector’s involvement in this, because they’ve enthusiastically embraced the fact that they need to change their working practices to lower the costs of doing things”.

The NIP states that around two thirds of infrastructure investment between 2011 and 2014 is likely to be privately funded. This, says Spence, is partly because of a change in the type of infrastructure the UK needs. The last 10 or 20 years were “dominated” by social infrastructure, such as schools and hospitals, but there is now a shift in focus towards economic infrastructure such as power stations or communications systems, which may be entirely or partly privately funded.

“Government still has a role, of course,” says Spence. “It has a big role in energy and water – but it’s not the same as social infrastructure, where it’s very direct procurement.” This shift, combined with public sector spending restraints and caution on the part of investors across the world, means government will be taking different approaches to funding and facilitating investment in infrastructure. For example, the Autumn Statement set out an agreement to work with pension funds to secure up to £20bn of money which will help to finance future infrastructure projects. This work, explains Spence, is about “opening up a long-term source of capital for everyone; not just the public sector – not even mainly the public sector.”

Pension participation
However, on the day we meet, the Times has run a front-page story reporting that the chancellor is planning to “raid” local authority pension pots to secure infrastructure funding, and that talks with private pension funds are not going well. It quotes a “senior MP” as saying that the idea of raising £20bn from private funds “has never been seen as a runner”.

Spence is robust in his dismissal of the story. “I don’t know where it has come from, and it’s completely off beat,” he says of the report. “We said in the Autumn Statement that we had two discussions going on with two separate groups of pension funds” – one of which involved the National Association of Pension Funds and the Pension Protection Fund, while the second included individual pension funds and infrastructure fund managers. “In that [latter] group there was, and still is, a significant number of local authority pension funds,” Spence says, adding that “discussions are going perfectly satisfactorily” with all groups. “In all cases, they have taken the initiative with us,” he continues. “We’re not going to them and saying: ‘We’re gonna raid your piggy banks to spend all this money’. For very good reasons, they all want to spend more money in terms of investing in infrastructure, and they want us to help them overcome some of the obstacles they face.”

Those obstacles include a lack of capability to assess infrastructure projects, and a desire for lower-risk investment models: these might, for example, allow pension funds to own assets directly rather than buying up infrastructure owners’ debts through investment funds, and get involved in developments funded primarily by investors rather than debt finance. While officials will need to be sure that new models of investment provide value for money for government, Spence indicates that ministers and officials are very open to new ways of working. The NIP included a number of examples of new or rarely-used funding models, such as toll roads and Tax Increment Financing – local authority borrowing secured against the rise in tax revenue stimulated by investments – that have been given the go-ahead by the Treasury.

“We’ve also talked about the fact that the government is slightly changing its approach to risk,” says Spence, “partly reflecting the damage that’s been done to financial markets since 2007.” Now, ministers recognise that they must be willing to share risk in particularly complex schemes, rather than simply trying to pass risk on to private investors. For a scheme such as Thames Tideway, for example, “government needs to do more and underpin the construction risk, which is unusually difficult in that case.” This is not, however, a “blank cheque for people to get a guarantee from government at any point in time; it is for the government to be more realistic about what risks the government can take and what still is the private sector’s role.”


Reviewing PFI
Even where government is still playing a direct procurement role, change is in the air. Another of IUK’s projects at the moment is leading a review of the widely-criticised Private Finance Initiative (PFI) funding model. Spence was a key player in developing the model during his first spell at the Treasury, so what does he see as the key lessons from PFI? Again, he says he’s constrained by an ongoing consultation; a slight defensiveness about PFI in general is also evident. Nonetheless, he says that many of the consultation responses are likely to suggest that “there is still a real problem with the expertise within government in procuring major projects.” Procurements take too long, for example, or fail to set out tight specifications at the start of the project. These problems aren’t endemic to PFI, he says, but apply to many big public procurements. “You could easily say that’s a lesson the MoD should have learnt,” he notes, “and it’s not a new message.”

He also suggests that a PFI review would not be needed if the public sector had been better at learning from its own mistakes: “The other thing I would say about PFI, and it may be true for all policies, [is that] a better way of taking a policy forward is always to look at where it could be improved and to try and achieve a process of incremental change.” He mentions one of the oft-cited criticisms of PFI: the large charges for seemingly small jobs, such as setting up an extra TV so that staff in the Treasury could watch George Osborne giving the Autumn Statement last year (which cost £450, in case you’re wondering). “In one sense, that’s not fundamental to PFI at all,” he says, “but someone signed that contract which allowed that to happen. I think if you had had a process of incremental change and reflection, we probably could have avoided ten years of [contracts like] that.”

Perhaps not surprisingly for a man who studied history at university, Spence is keen for civil servants to learn from the past in all areas of public procurement: “What we’re good at doing, as civil servants, is helping ministers make decisions on the basis of what’s happening today or what the issues are looking forward, and then we seem to forget about the past very quickly,” he says. Government has been criticised for its lack of reliable management information, which would help departments review their spend and procurement decisions, but Spence says this isn’t always the case. Thanks to parliamentary scrutiny, he notes, “we’re far more transparent about PFI than we are about anything else in the procurement space.” But across government procurement, “we’re not so good at saying: ‘Well, that’s actually what happened after the procurement decision that we made, so we could learn the lesson of a, b and c and could build that in for the next scheme’.”

Spence describes his role as that of a facilitator. Departments remain the commissioning organisations and retain accounting officer responsibilities for their infrastructure projects, but he and his team facilitate discussions within and between departments and their partners about how to make these projects a success.

What, then, would he like to see from departments so that he can help them more effectively? “One of the difficulties within the public sector is that change in the way things are done is quite tricky to bring forward,” he says. “But the environment we’re currently in, in terms of deficit reduction, means that it’s really important to look at all of the ways we do things, such as procurement, and make improvements”.

One key area to change will be “the traditionally quite adversarial relationship between the public and the private sector on this”, he concludes, so that “together we can strip out needless costs. If we do that collectively, both departments and [the Treasury] get more for our money.” There are win-win benefits out there to be had, says Spence, but only if civil servants are ready to move forwards: “Departments really benefit from this in terms of their budgets at the end of the day, but they have to be open to change.” ?

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