Public-Private Partnerships: Driving Growth, Building Resilience

Public private partnerships report cover
The LGA has commissioned Partnering Regeneration Development and Newbridge Advisors to produce this good practice guide. It aims to support councils to plan and establish more effective public-private partnerships, which can deliver the investment, development and services that are essential to boosting economic growth and recovery.

Introduction

Against a backdrop of significant uncertainty and challenge, resulting from the COVID-19 pandemic and continued pressures on budgets, councils across the country are demonstrating ambition, agility, and incisiveness in delivering a greener and fairer economic recovery.

Unprecedented actions such as protecting the vulnerable, mass-testing, the nation-wide roll out of the vaccine, distribution of business support grants, and the establishment of redundancy and recovery taskforces have demonstrated what can be achieved through strong partnerships between the public and private sectors.

Whilst public-private partnerships (PPPs) are undoubtedly challenging to deliver and not without their controversy, robust and well-coordinated partnerships present opportunities to bring together the resources, expertise, and powers available in ways that cannot be achieved by either sector in isolation. As such, councils are now rightly exploring how this investment could unlock a range of social, environmental, and economic benefits aligned to local and national priorities.

The Local Government Association (LGA) has commissioned Partnering Regeneration Development (PRD) and Newbridge Advisors to produce this good practice guide. It aims to support councils to plan and deliver better and more effective PPPs that can deliver the investment, development, and services that are essential to boosting economic growth and recovery.

The guide has a practical focus and draws on insights from practitioners, councils, and special interest group to capture the key challenges, barriers and opportunities that exist in both establishing and running successful partnerships. Drawing from on-the-ground experiences, we look at how approaches can be improved, where risk can be mitigated, and how working practices can support resilient and effective intervention.

The guide is split into two parts:

Part 1: The case to act - exploring how and why PPPs are a valuable mechanism for supporting a fair and inclusive recovery and other key issues that councils around the country are facing.

Part 2: Taking action - detailing the key steps that need to be taken for a successful partnership and the range of ways that PPPs can be designed, mobilised and managed to address key challenges. Part two also includes case studies and insights from contemporary examples and further consideration of the characteristics and merits of different partnership structures.

Part 1: The case to act

From the days of the Private Finance Initiative (PFI), through to outsourcing and more recently flexible and commercially-oriented partnerships, councils and private providers have enhanced their knowledge of how PPPs can work well. In this section, we look at the context of issues and challenges faced by councils today and how PPPs can be used to address these.

What is a PPP?

For the purposes of this guide, a PPP is any form of partnership – whether contractual, corporate or collaborative, between public and private sector organisations. In these PPPs, the role played by public and private sector organisations are flexible to meet the requirements of specific projects and to best harness the skills, resources, and preferences of the respective parties.

This definition is distinct from PFI which was a specific form of contractual arrangement that emerged during the 1990s and grew to become a key platform within government investment programmes in the 2000s. Typically, PFIs saw the private sector fund the cost of building and operating social infrastructure such as roads and hospitals, with the public sector making repayments over a concession period. Much of the social infrastructure we use today was delivered under PFIs but this model has come under criticism due to high repayment costs and, in some cases, high maintenance costs and complex contractual arrangements.

Current Context for the Case to Act

The themes explored below have emerged through discussion with practitioners in both the public and private sectors working on a range of PPPs:

Constrained public finances: after years of austerity and additional pressures, particularly following COVID-19, council finances are constrained. A National Audit Office (NAO) survey of councils across the country shows that local government does not expect its finances to return to pre COVID-19 levels until 2023/24 at the earliest­­­. Near to mid-term cash flows will continue to be burdened with extra costs for local services, therefore councils are being cautious about spend and seeking to increase revenue and capital generation.

Many councils are facing an increased need for temporary housing and its ongoing management. Responding to these needs could cause financial pressures, or simply remain unaddressed. Partnership can be a good solution, where funds are raised via a Joint Venture (JV) company with a services provider. The council’s covenant can attract investment from investors into the upfront acquisition of temporary accommodation. London Borough of Waltham Forest has taken this approach in its JV with Mears Group (see case studies section).

Housing and regeneration: the government aims to build 300,000 new homes per annum to meet housing need. Whilst the areas with greatest housing shortages are located in London and the south east, the housing crisis manifests in different ways across the country with affordability issues being faced by rural communities as well as larger towns and cities. Despite the Housing Revenue Account (HRA) debt cap being lifted in 2018, many HRAs are cashflow constrained, particularly where authorities are facing an affordable housing crisis, rising costs of fire safety works and energy retrofit. General Fund accounts are also under stress from reduced income and an increased call on services. PPPs can support by providing the capital investment to deliver major projects and programmes that would otherwise be delayed.

Study participants noted that PPPs can be well suited to addressing housing and regeneration challenges. They can ensure these strategically important projects are delivered and accelerate delivery through availability of capital. In some cases, the majority of the risk and capital can be borne by the private sector, with councils incentivising delivery by deferring land receipts or providing under-writes. Westminster City Council entered a successful JV with Linkcity after development plans on the residential-led scheme in Luton Street were at risk of stalling due to market conditions (see case studies section).

Climate crisis: the UK has set a target to be carbon neutral by 2050 and cities such as London and Bristol have committed to their cities being carbon neutral by 2030. The LGA Climate Change Survey 2020 found that nine out of ten councils had declared a climate emergency, and around 80 per cent had set an official target for the authority to become carbon neutral. The most frequently identified barrier to tackling climate change was funding (96 per cent), followed by legislation or regulation (93 per cent) and lack of workforce capacity (88 per cent).

Climate change is arguably the biggest challenge of our time and presents an opportunity for public and private sector actors to align their interests around a common goal. Investment of capital and skills by the private sector represents a major opportunity to support public organisations in delivering their green agendas. Government funding such as the Social Housing Decarbonisation Fund have started to emerge but councils need to understand their assets and develop the solutions before these funds can be meaningfully deployed.

“The cost of achieving net zero is calculated to be at least £200 billion. If we can find the right financing models we can turn this cost into an investment opportunity, and a ‘skills and jobs dividend’. Local and national government need to work together with the investment community to realise this massive dividend.”

Core Cities

Fuel poverty: fuel poverty is closely related to the climate crisis but specifically addresses the affordability challenges faced by the country’s most vulnerable people living in homes that are poorly heated and insulated. Data from Department for Business, Energy and Industrial Strategy (BEIS) shows that 13.4 per cent of households (3.18 million) in England are living in fuel poverty and as fuel prices rise and incomes remain flat, councils are faced with even more of their residents falling into fuel poverty. As with climate change, there is a case for public and private sector organisations to share resources to tackle fuel poverty, something which will likely move up to priority list when “Decent Homes 2” emerges following the government’s review which is due to end in summer 2022.

Energetik is an energy company that was established by Enfield Council and has wide ambitions to service residents across the borough with low carbon energy, with surpluses reinvested into infrastructure and education programmes (see case studies section). Energetik highlighted that councils are well placed to deliver more affordable energy solutions for residents. Where the private sector would seek to return a margin, the public sector can elect to reinvest surpluses to deliver low and transparent tariffs.

Town centre renewal: at the end of 2020, just under 14 per cent of high street retail and leisure properties were vacant in the UK, according to the Local Data Company and the pandemic has increased pressure on some high street businesses that are already struggling. As part of the Government’s ‘levelling up’ agenda, £3.6 billion has been made available through the Towns Fund to support local authorities to deliver projects that will drive the economic regeneration of towns to deliver long-term economic and productivity growth.

The Towns Fund requires councils to work collaboratively with the private sector to “address some of the key investment criteria identified by overseas investors as important when considering investing in regional locations, including transport, skills, real estate availability and local business support”. The private sector (in the guise of landowners, investors, developers or business owners and employers) has a number of key roles to play in supporting the development and delivery of locally-developed visions and aims for improving town centres and creating sustainable employment opportunities.

We are seeing local authorities acquiring and bringing new life back into distressed retail assets. However, this can be challenging with unpredictability on borrowing for commercial activities. Partnerships to redevelop or deliver new retail-lead schemes on public sector land can rejuvenate high streets and respond to changing needs. Worthing Council has partnered with London & Continental Railways (LCR) to deliver a mixed-use town centre scheme, where the private sector had failed to deliver alone (see case studies section).

Supporting local recovery and growth: development is often approached on a piecemeal basis by parties without a long-term interest in the assets they deliver. The application of policies designed to mitigate economic challenges and support communities through developer obligations, can also be highly variable in supporting the local economies they are designed for, especially in terms of ‘end-user’ employment which often comes after the developer’s involvement has concluded. Partnerships offer the potential for a genuine focus on local priority outcomes founded in broader measures of success aligned with the council’s corporate priorities.

Longer-term partnerships, where the private partner takes a long-term stake in the success of an area, can enable broader measures for successful places to be established and offer greater influence over long-term local employment planning and community benefit. Argent commented that successful place development for them requires a clear focus on both the quality and functionality of the public realm between the buildings, which they believe has a critical role to play in creating successful places.

There is a clear and compelling case to act for public and private sector organisations to collaborate to address the challenges currently faced in our towns, cities, and rural areas. What is also clear, however, is the need for effective partnership design to ensure that they are correctly set up for success.

The following section explores the key steps for designing and delivering a partnership.

Part 2: Taking action

Seven key steps for designing and implementing your partnership approach

This section sets out seven practical steps for successful progression through the full partnership lifecycle - from inception through to exit and life beyond the partnership. Whilst councils can begin this process from any point on this journey, effective and regular consideration of the ‘journey ahead’ will support each partnership to deliver its full potential.

The seven steps are:

  • Step 1: Defining an overarching vision and long-term outcomes that are market-facing.
  • Step 2: Building the brief - core priorities and ‘red lines’ and undertaking essential due diligence.
  • Step 3: Reviewing partnerships options (contractual, co-operation and corporate structures) for achieving the desired outcomes.
  • Step 4: Identifying and choosing the right route to market.
  • Step 5: Effective preparation and making a strong start.
  • Step 6: Managing the partnership in its ‘steady state’.
  • Step 7: Finishing well and moving on successfully.

Step 1: Defining an overarching vision and long-term outcomes that are market-facing

PPPs take significant time and resources to establish. This upfront investment needs to be justified by the returns of the project and wider social and economic value created, that otherwise would not be achieved. This sometimes means that PPPs realise maximum benefits over a long-term horizon and so require long-term planning that goes beyond political and economic cycles.

An overarching vision is crucial, especially for any long-term partnership that may see changes in the political landscape. In setting the vision, it is important for councils to acknowledge the wider transformative potential of the investment that PPPs can channel into the area. The opportunity to think boldly about what makes successful places, communities, and economies; and to tackle key inter-sectoral challenges such as the climate emergency should not be afterthoughts, but part of the core aims. Whilst the private sector alone is unlikely to be able (or inclined) to develop and deliver a complete solution to achieve these aims, the partnership itself must embrace and respond to these issues from the earliest stages.

As part of this, councils should seek to define their vision and partnership needs through the lens of the market and their potential partners. To do this, councils must consider both the short and longer term needs of the partnership and must provide clarity, surety and flexibility.

Clarity – A clearly defined portfolio of projects, opportunities or outcomes will not only attract a stronger market response from the private sector but will also enable more detailed commitments to be secured at procurement stage.

Where a long-term project pipeline cannot be defined, the council should commit to a ‘first wave’ of projects that the partnership will deliver and provide information on further opportunities. This will ensure a transparent procurement process and suitable bidder interest based on clearly defined objectives and partnership opportunities.

The importance of being clear on desired outcomes and expected outputs was cited by a number of study participants as being essential for partnership success; aligning project outcomes with broader council strategies and priorities is crucial, supporting cross-departmental buy-in at the earliest point.

Surety – Private sector partners will need to be certain that the significant up-front investment and opportunity cost required to commit to developing and mobilising a PPP will be justified by a successful partnership which benefits from the public partner’s full support.

It is unusual for private sector partners to pursue full remediations or damages resulting from partnerships that have failed to deliver, even where the public sector partner has elected to abandon the partnership. As such, very careful up-front judgements about the public sector’s commitment to the partnership will be made by potential partners. Councils should communicate surety and commitment to the project from the earliest stage to attract the greatest market interest. This requires that effective communication and governance arrangements are in place for the council’s stewardship of the partnership and the partnership’s own mechanisms for project delivery.

Flexibility – The need for surety and ‘fixing’ key elements of the partnership to attract the right market interest must be complemented by designing flexibility into its scope.

Private sector partners engaged to develop this guide stressed that, whilst a clear vision and aims for a place and community are important, councils should not seek to hand over fully developed masterplans to their chosen partners. This approach does not present sufficient scope for the parties to work collaboratively utilising the best of the skills and capacity across the parties. As such, a balance of ‘fixed’ and ‘flexible’ elements is essential.

The flexibility that will need to de defined at the earliest stage. It will need testing and defining through the appointment process and must be reinforced through effective governance arrangements and practices implemented during the mobilisation and ongoing management of the partnership.

A further clear message from practitioners is that, whilst clearly defined aims and programmes are essential for PPPs, unintended limitations that might hinder its ability to deliver against unforeseen opportunities should be considered and avoided. For example, this could happen if the terms of the procurement of the private sector partner precluded activities that were later found to be important.

Step 2: Building the brief: core priorities and ‘red lines’ and undertaking essential due diligence

The translation of the vision into a working ‘brief’ of strategic parameters and red lines is an important early activity to get right, especially as this process will often involve multiple departments within the council and may require a managed level of consultation with councillors and other key stakeholders. This early work can pay significant dividends downstream by identifying potential areas of divergence. It is also useful to plan for any advice and third-party input the council might require to progress the legal, financial, commercial, design, development, or socioeconomic elements of establishing the scope of the partnership.

Setting core priorities – this can include setting out how the partnership must respond to and deliver against core policies and strategies (including the Corporate Plan and other high-level strategy documents). Priorities should also be set around the key outputs and outcomes that the partnership should deliver, including the physical asset or service deliverables, wider place, economy and environment outcomes and the council’s preferences around the nature of its involvement and returns.

Setting key ‘red lines’ – it is crucial to define the council’s scope for participation in a partnership at this early stage, for example: defining capacity for risk and lending; establishing that the core elements of the brief are within the scope of the council’s authority; and identifying which checks and balances will be required throughout the process of planning, establishing, and mobilising the partnership. Whilst it may not be possible to fully settle these matters at this stage, early awareness will enable the council to identify areas where advice might be sought and to work confidently towards designing these red lines into the partnership approach.

Councils highlighted that clear contractual frameworks setting out requirements, non-negotiable deliverables and ‘red line’ boundaries are essential. By setting expectations upfront, miscommunications that may compromise the health of the partnership can be avoided in later stages.

The importance of due diligence – it may not be feasible to undertake a full suite of surveys for key assets that are to be transferred into the partnership, however it is essential to undertake a sufficient level of due diligence into key sites and assets and identify any encumbrances that could have a material impact on the delivery and viability of the partnership. For example, clear titles should be established for key land parcels that are central to the partnership’s development strategy.

Numerous examples have been identified where partnerships have been aborted at the procurement stage or have failed to deliver on their core aims because of unforeseen encumbrances on the land title. For example, where a council partner had predicated its partnership model on surpluses generated by development to which it was not actually entitled.

Step 3: Reviewing partnerships options (contractual, co-operation and corporate structures) for achieving the desired outcomes

As considered in detail later in this guide, there are multiple forms of partnership – contractual, corporate, investment and collaborative – and there is no fixed rule about which approach works best for particular sectors or projects. Each structure needs to be carefully considered for its relative merits and draw-backs for the project.

It is important for councils to recognise that form must follow function; the up-front work to define the need for the partnership, key red lines, and preferences will be instrumental in making the case for the new partnership and in determining its form.

Councils should use this step to also re-confirm that they want and need to appoint a partner, rather than procuring an organisation to deliver a fixed, pre-determined solution. This will have a bearing on how both parties approach risk, resourcing and reward and confusing the two types of arrangement can be costly and damaging for all involved.

Soft market testing – before determining the route to market, it is useful to undertake a soft market testing exercise with potential partners. This will support open dialogue and feedback about market preferences and how the council’s needs could be best approached through a partnered model, as well as informing options for the route to market.

Effective soft market testing will not only support the strategic definition of the partnership, its projects and route to market, but will also give confidence to the market about the council’s commitment to the partnership and to working effectively with the market.

This process also presents an important opportunity for non-binding dialogue and key issues can be identified and re-considered before the formal appointment process begins.

Some funding partners engaged outlined their preference for early-stage involvement, particularly for development partnerships. Early-stage market-sounding can allow the funder to shape the partnership design and ultimately ensure fundability.

Step 4: Identifying and choosing the right route to market

Choosing the right route to market is key for both the council and bidders. Procurement via existing frameworks can be an efficient route but councils must be comfortable that providers on the framework are capable of meeting their requirements. As mentioned above, soft market testing is helpful to gain targeted feedback from bidders on the framework, especially for testing the potential impacts of issues such as intended contractual terms.

There may also be occasions where a traditional procurement process is not required. For instance, under land and funding transactions where explicit services are not being procured, authorities can secure partners without the need for an OJEU compliant procurement process.

This can be attractive for the reasons Public Sector PLC highlight below. However, legal advice must be taken when selecting the right appointment route and in all cases the council must satisfy its requirements to secure best value and ensure that any transaction is compliant with subsidy control rules.

“Our projects are LLPs and 50/50 owned by ourselves and our public sector partner. This means they often sit outside procurement regulations thanks to there being a land transaction to the JV, saving time and money in the earliest partnership stages”

Public Sector PLC

Study participants highlighted that political cycles must be factored in when designing and preparing a PPP; finding the right time to plan, start and deliver a partnered solution is essential to avoid wasted resource and abortive work.

Supporting flexibility within the appointment process – the benefits of flexibility (for example, the types of projects that may be delivered or the duration of the partnership) should be explored with legal advice and established within the appointment process. Where this is a procured route, using the example of a property development partnership for example, the specification could:

  • promote flexibility about how assets can be developed and used; providing scope for bidders to introduce innovation in their proposals that make the best of market conditions. For instance, if civic offices were re-provided, the council may wish to protect flexibility about whether it ties itself to using these, or whether it would want to retain an option to generate revenue through provisions to let the commercial property 
  • protect the option for further assets or sites to be transferred into the partnership
  • avoid unnecessarily limiting the future activities that the partnership could become involved in and therefore limit the value it can deliver
  • set out the mechanism to extend the life of the partnership.

“Plan early and be proactive – procurement of services will take a lot of effort and things may have changed since initial procurement”

Michael Berrington, Local Partnerships

Step 5: Effective preparation and making a strong start

The critical period following the appointment of the private sector partner and the legal formation of the partnership requires particular focus and significant energy to get right. Whilst this milestone is rightly celebrated as a success, it is also the start of the substantial delivery phase.

To be successful the partnership will require new skills and practices both within itself and ‘around it’, as are required for an effective interface with the wider decision-making processes that will influence its success and pace of delivery. For example, key workstreams may include drawing investment, acquiring land, procuring contractors and advisors and dealing with planning. These activities will require action both within the partnership and by the council in its own right.

Councils often partner with private sector partners who are specialists in a limited number of activities. However, councils are multidisciplinary by nature with departments and processes that can be quite separate in nature (by design or circumstance). As such, working with the partnership will mean very different things to different parts of the council.

Effective tools that councils can put in place to support new partnerships include:

Agreeing the first Business Plan and first 100 days plan – the first Business Plan should identify and seek the key approvals required from project shareholders for the initial period (for example, for ‘first wave’ projects to be delivered in the first few years), as well as setting out the key resources, outcomes, consents and wider activities required to deliver the Business Plan. This document will play an important role in winning and sustaining support and resource from wider stakeholders within the council.

A detailed ‘first 100 days plan’ is useful in establishing a more granular work plan for key people and workstreams within the partnership and how these workstreams will fit with the individual actions and processes of the partners.

Energetik made the decision to split programme funding into different tranches rather than as a single sum. This has encouraged a business-planning mindset and constant monitoring of performance, allowing for greater flexibility and adaptability as the programme develops.

Developing an effective 'client function’ on the part of the council – as noted above, in most partnership models the council will typically interact with and influence the abilities of the partnership to deliver its business plan in a wide variety of ways, for example:

  • members will need to understand how the partnership will deliver on key policy commitments and local community priorities
  • the section 151 officer will oversee and manage the overall impact of the partnership’s activities on the council’s financial position
  • planning officers will need to grant or deny consent for developments proposed by the partnership in an independent fashion that does not consider the council’s involvement
  • housing, regeneration and property colleagues may be directly involved in the development delivery of development schemes
  • legal officers will need surety that transactions and dealings are dealt with in an intra-vires manner and may have transactional responsibilities
  • economic development officers will be responsible for defining how the partnership will contribute to local social and economic priorities.

Therefore, working effectively with the partnership to approach each of these roles in a joined-up way requires a clearly defined client function within the council, which is supported through the resourcing plans and workflows set in place for each respective officer.

Sufficient senior representation is important to influence and coordinate key groups as required to support the partnership (whilst recognising where interests must be separated).

Many study participants noted that building strong relationships across a partnership is crucial to long-term success and early buy-in from stakeholders is essential. Strong relationships between the private sector and individuals in different roles, departments and levels of seniority can build long-term resilience and mitigate disruption caused by political movement and staff churn.

Establishing practices and processes for key workstreams – aligned to the development of the client function, the partnership will require clearly defined working practices and identification of dependencies for each core workstream. A number of councils have chosen to establish Service Level Agreements for core processes to support the establishment of effective ways of working.

Training, capacity and team building – new roles within and in support of the partnership will create new and often long-term obligations for key individuals (for example, members of the partnership Board, the core executive team and wider services that interact with the partnership). Suitable training should be provided and these new roles will need reflecting within resourcing and capacity-planning activities.

Understanding about the rights of the council and the obligations of the contractor is key. PPPs can become quite complex and it is important to have this upfront clarity. Targeted training for council personnel is crucial to effective management”

Michael Berrington, Local Partnerships

Committed resource from the public sector was cited by private sector partners participating in the study as key to the ongoing success of a project; this resource can ease communications between partners and act as a champion to the project as it develops.

Stakeholder communications and management – support from colleagues, elected members, local partners and local communities will greatly enhance the success of a partnership. A clear strategy and plan should be mobilised to build awareness and support for the partnership, its aims and projects from the earliest stage, but will be important throughout the full lifecycle of the partnership.

When planning stakeholder engagement, it is important to acknowledge and address public uncertainties surrounding PPPs. The developer U+I undertook a survey for a 2020 report into PPPs which found that among the general public, 56 per cent of people agreed that public bodies should work with private sector businesses to help address the housing shortage in the UK. However, 45 per cent had a negative perception of the use of PPPs to develop publicly-owned land. These challenges need to be addressed if both local communities and councillors are to understand the potential benefits of PPPs.

Public Sector PLC is partnered with a number of councils across the country. Ensuring that a JV is communicated properly is essential to their success and they have found that working with their council partners to develop a JV ‘brand’ for each of their partnerships can support buy-in across stakeholders and promote a feeling of ownership within the council.

Delivering ‘early wins’ – many councils and their partners have successfully implemented high impact, low cost ‘early win’ interventions which demonstrate how the partnership will contribute to place-making and deliver community amenity, whilst also encouraging the public and key stakeholders to support the partnership. Early wins are particularly important where the significant upfront capital investment in long-term projects is not readily visible to the public.

Step 6: Managing the partnership in its ‘steady state’

The ‘steady state’ stage of the partnership after the initial period of intense activity can be a challenging period for PPPs, whether following successful mobilisation of the partnership, or the initial ‘first wave’ projects have been delivered. Uncertainty around what comes next and the challenges of taking new projects through the partnership may result in a period of inertia if not adequately planned and managed.

At this stage the fully mobilised partnership will have developed its capacity and experience and a local legacy of impact, which must be capitalised on. As such, the partners must develop clear plans and actions to effectively prepare for this period of ‘calm after the storm’.

In advance of reaching this steady state key actions should include:

  • agreeing the business planning cycle and the process for sign-off, with clear plans for the development and implementation of the ‘second business plan’ agreed prior to the completion of the first phase projects if possible
  • member and stakeholder engagement must be sustained to remind key parties and influencers about the long-term purpose and value of the partnership and make the case to act for the next wave of projects. A clear focus should also be placed on publicly celebrating successes and positive impacts
  • lessons learned should be openly explored and agreed between the partners, with a Continuous Improvement Plan agreed, this can support the partners enhancing the value unlocked and efficiencies going forward, as well as identifying and addressing any areas where the key contracts and processes have been found to provide insufficient coverage in practice
  • key local priorities should be re-affirmed and the potential for the partnership to respond and address new and emerging opportunities should be considered (noting the contractual and statutory limitations of the partnership)
  • key performance indicators and targets for the partnership should be reviewed and revised as appropriate to support these processes, (again, within the bounds of the partnership agreement) to ensure that the partnership continues to demonstrate its relevance, impact and fit for purpose.

Effective and regular performance assessment and an active commitment to continuous improvement will support both ‘steady-state’ and also end of life planning for the partnership. Local Partnerships provides valuable resources to support councils to manage contracts, including benchmarking and exploring options for extracting further value.

Energetik identified non-negotiable outcomes at an early stage and set KPIs reflecting these for each of their operating contracts. These KPIs hold their contractors to a high standard and are linked to remuneration. This has led to better outcomes for both the partnership and Enfield’s residents.

Start 7: Finishing well and moving on successfully

The end point for the partnership may seem very distant during its design and inception, but sufficient ‘end of life’ planning will become a strategic and operational necessity in due course, whether this is a point that is defined by the completion of a programme or business plan, or whether this is a result of the parties electing to conclude the partnership. A planned period of several years may be required for a smooth ‘runway’ to ending the partnership arrangement.

To facilitate the transition to the operational state and wind down of the partnership, proactive planning and management needs to encompass the following elements:

  • the parties need to clearly communicate what their desired future involvement with the partnership’s projects is and an open and honest-dialogue must take place about what this means for the future actions of each
  • the business planning cycle for the partnership must make clear provisions for winding down the partnership, including roles and responsibilities and the costs associated with this (including reasonable third party costs and resources required to support this) should be identified, as well as the approach to covering these costs
  • a contractual review should be undertaken to identify where provisions in the original contract are not sufficiently clear for the ‘end of life’ stage to identify and address any key gaps (e.g. regarding matters such as asset-related surveys or hand-back provisions, transfer of logs and records, maintenance and latent defect obligations, employment provisions, obligations to ongoing costs, etc)
  • a clear dispute and blockage resolution process developed and actioned to deal with issues such as maintenance backlogs or address any latent defects before the expiration of contractors’ warranties
  • the transfer of any qualifying employees who are subject to a Transfer of Undertakings Protected Employment (TUPE) will require a carefully planned and executed process to secure their future employment
  • a Continuity and Communications Plan should be developed to explain the end of the partnership, the implications of this and plans to mitigate any potential disruptions to services or benefits for the public or other key stakeholders.

Many of the key lessons for PPPs draw upon learnings from PFI contracts that are coming to expiry. Local Partnerships are working in partnership with the Infrastructure Projects Authority and sponsoring departments to support councils to develop the most effective approach to support PFI contracts that are due to expire over the next decade. This support relates specifically to ensuring that the PFI facilities are in an appropriate condition, and there is a credible plan for continuity of service provision at the point of hand-back.

Case studies

This section looks at how different types of partnership have been used to deliver high impact outcomes in different contexts and against various priorities.

Luton Street residential-led, mixed-use development - Westminster, London

A mixed tenure housing scheme across two sites, with sports and leisure community space, including extensive public realm.

Project overview

In 2019, Westminster City Council entered into a JV and funding agreement with Linkcity, development arm of the Bouygues UK group, to deliver 171 new homes, across two sites, including 62 homes for intermediate and social rent in a prime London location at Luton Street in Westminster. Luton Street is part of the first phase of the wider Church Street regeneration programme. The scheme will also deliver a community centre with Sports England compliant facilities and extensive public realm. 

The scheme had stalled following a slowdown in the central London housing market and Westminster City Council stepped in to ensure the scheme continued to be delivered at pace. 

The JV was structured as a Limited Liability Partnership, giving the council and Linkcity the flexibility to manage the project and retain control over their risk exposure. The council also provided financial support through a development loan to the JV on commercial terms, which provided the certainty required to ensure the project was delivered during the post-Brexit market uncertainty whilst also generating an income stream for the council. 

Westminster City Council also acted as the ‘off-taker’ for the long-term ownership of affordable housing. The social rent homes are retained by the council within the HRA, and the intermediate homes will be acquired by the council’s wholly owned subsidiary, Westminster Builds.

These interventions, coupled with an underwrite from Westminster to acquire the homes if the sales price fell below an agreed floor, ensured that the scheme was delivered swiftly. The homes are now on site, due for completion in Autumn 2022, with a healthy pipeline of pre-sales being achieved.

Westminster City Council invested in the JV through its wholly owned development company, Westminster Builds, which is now reviewing further opportunities for investment both directly and with partners across the Borough.

Key points of learning

Councils have many tools at their disposal to support delivery, including acting as a partner and/or funder for a scheme. Using a council’s financial and wider covenant strength can ensure that schemes can deliver outcomes in a timely manner.

Where a council performs multiple roles on a transaction, it is important to separate the duties and responsibilities of each role. For example, the role of Westminster City Council as lender was distinct from the role of its wholly owned company as a member of the JV. Conflating these different roles can lead to conflicts of interest. Therefore, it is key that documentation and governance reflect the different drivers, controls and processes.

Energetik, council-owned district heating provider - Enfield, London 

A district heating solution for new and existing properties, through establishment of a wholly owned company which partners with private service providers.

Project overview

Energetik is a limited company, set up and wholly owned by Enfield Council. It is a new local energy company that provides heat and hot water directly to homes and businesses from local sources, rather than gas and electricity like traditional private energy companies.

Incorporated in 2015 as Lee Valley Heat Network Operating Company Ltd, Energetik is the trading name and Enfield Council is the sole shareholder. The company operates at arms length from the council but with council representation on the board and robust governance arrangements in place. The company has a lean management system and partners with the private sector to deliver metering, servicing and delivery of capital works to install the heat network system, such as Vital Energy which is currently on site with the Energetik Energy Centre in Enfield.

The heat and hot water Energetik provides is supplied through a series of community heat networks. As a local energy company, Energetik is seeking to revolutionise the energy industry and be a trusted supplier by providing better value energy that is reliable and environmentally friendly. The most recent investment will involve taking excess heat from the North London Waste Authority (NLWA) Energy Recovery facility to provide heating to the planned Meridian Water scheme which is expected to deliver up to 10,000 new homes plus employment space.

Whilst the company needs to be run on a financially viable basis, as a council-owned company, Energetik can take a longer-term view and also take account of the wider social and environmental benefits that the council’s investment brings. They do not charge a premium for low carbon heating; charges are stable and transparent which means that they cannot exceed the price charged for gas as verified by the Heat Trust formula.

Energetik’s heat networks make use of waste heat sources and new heat technologies as they become possible in the future. They are working on a series of heat networks in regenerations areas across Enfield, including Meridian Water, Arnos Grove and Ponders End. The company has also secured GLA funding to support a pilot project to assess heat networks that can be retrofitted to existing properties.

Key points of learning

Enfield Council has recognised the limitations of private providers in delivering new and innovative heating systems, and realised the potential of using public investment to address the market failure.

This precedent demonstrates the benefit of operating in a commercially-oriented way that still delivers a high value service to residents as well as environmentally sustainable outcomes. Retrofitting new technologies into existing homes as well as focussing on services to newly built properties. Working in an integrated way with the local town planning framework to ensure a suitable supply of new customers within a reasonable timeframe.

More Homes, Mears and Waltham Forest JV - Waltham Forest, London

A JV Solution for temporary accommodation, leveraging private investment.

Project overview

London Borough of Waltham Forest entered a JV with Mears Limited to secure homes for 40 years and give households in need a sense of long-term safety and security. The JV expects to purchase 400 homes to house people in temporary accommodation and those for whom the council has accepted homelessness duty. At the end of the 40-year period, the homes will revert to the ownership of Waltham Forest.

The JV partnership will raise the £88 million needed to purchase the properties by issuing bonds to private investors and use the funds to acquire homes to be held and let. Funding was provided by BAE Systems Pension Fund. The council will lease homes from the JV paying a rent (Local Housing Allowance and top up) which will enable the JV to pay a return to investors and still represent good value for money to the General Fund.

All the properties will be brought up to the Decent Homes Standard, the UK Government’s standard for social housing, which will ensure these properties are high quality. Mears will manage and maintain the homes.

The properties will be a mixture of one, two and three bed properties. Besides giving households a safe roof over their head and the opportunity to enjoy full healthy lives, it will mean that money from the General Fund budget which was used to provide temporary accommodation can be re-directed to fund the construction of new homes. It currently costs the council an average of £47 per week for each household in temporary accommodation

Key points of learning

Waltham Forest has successfully partnered with the private sector to provide management and maintenance services. The borough leveraged their financial covenant to raise funding from institutional investors to fund upfront capital acquisitions and works.

This case study demonstrates an innovative model that enables local authorities to reduce their temporary accommodation costs and provide residents with better, longer-term homes. It is more innovative than more traditional investor models which risk leaving local authorities with significant risk exposure.

Worthing Borough Council and London and Continental Railways - Worthing

A land pool partnership will deliver a key town centre development site in Worthing.

Project overview

London and Continental Railways (LCR) and Worthing Borough Council (WBC) are in a public-public partnership focused on development and regeneration. The partnership was formed via a contractual partnership using a land pooling agreement as the basis of the contractual relationship, with both parties making their land ownerships available with each party’s share in the partnership being linked to the respective value of their landholdings. Profits and returns are distributed based on each party’s shareholding.

LCR acts as the development manager for the partnership using their internal expertise and resources to manage the proposals for the development sites. LCR also provides working capital to the partnership to cover site promotion and related consultancy services associated with bringing the sites forward. In return for providing services and working capital LCR will earn a greater equity share in the partnership.

The partnership is initially focused on promoting and realising development on several publicly owned but previously stalled town centre sites. Development of the sites will help realise WBC’s vision for the town centre and the partnership has a clearly defined set of objectives around stimulating the delivery of jobs, homes, and investment.

This partnership will bring forward a key development site in the city centre that the private sector had failed to deliver on its own; delivering 200 homes, commercial space and a cinema to complement the nearby Connaught Theatre.

Key points of learning

Successful implementation of a land pooling model between public sector organisations, which has enabled an enhanced development site without the need for a costly procurement exercise.

It is an example of a council taking control where the market has failed to deliver, or sites have stalled. The partnership benefits from LCR’s commercial delivery expertise, funding and sharing of development risk between the parties on an equity share basis. It allows the public sector to keep control of the type of town centre uses delivered and pace of homes delivery.

Wirral Council and Muse Developments JV - The Wirral

The 50:50 JV will deliver multiple projects including A grade office space, 651 new homes, bus station upgrades and a new market in Birkenhead, The Wirral.

Project overview

The JV partnership responds to Wirral Metropolitan Borough Council’s (WMBC) plan to drive self-sufficiency in the council and play an active role in Wirral-wide growth. In its decision to deliver through partnership, WMBC sought to generate revenue streams and financial returns from its land and minimise undue financial risk by encouraging private sector investment.

WMBC opted for a developer-led proposition where the council would benefit from a developer’s delivery expertise. Following a two stage OJEU procurement, in 2019 WMBC entered into a 50:50 JV with Muse Developments for an initial 10-year period to deliver its Birkenhead town centre regeneration project.

The Wirral Growth Partnership will assemble land and underwrite CPO costs, secure consents, and deliver the projects. Each phase is delivered as a separate project through the corporate entity, with the council benefiting from a residual land value of council assets once developed, interest on any deferred land payments, and share of surplus/profit achieved through the JV.

Some notable characteristics of the partnership are that it will enable the council to lease and leaseback its civic assets and retain the freehold for non-housing sites. As is typical of these corporate partnerships, Muse provides funding to match the value of the equity land value from the council and secures third party finance to the Special Purpose Vehicle (SPV). Council resource costs for establishing and managing the partnership are issued as loan notes to the JV and accrue interest.

In addition to securing a popular planning consent, the Wirral Growth Company has secured significant investment for the development of its two new Grade-A office schemes.

Key points of learning

The formation of Wirral Growth Company has brought significant inward investment into Birkenhead. The partnership has enabled WMBC to make best use of its operational and investment properties, maximising returns on investment land, whilst also rationalising its civic assets to reduce costs. The high-grade office buildings will also deliver on the council’s commitment to improving its carbon footprint through efficient building design.

The Wirral Growth Company allows the council to benefit from value uplift and take a longer-term view about land use and in particular where it may want to promote different types of development in the longer term to respond to the local needs. Wirral Council as landowner is also able to ensure the sites included in the agreement deliver wider growth, social and community benefits.

The seven key steps in summary

Summarised below are key elements of governance and control that should be put in place for each of the seven key steps above, to manage and mitigate risk throughout the partnership.

Assessment: Defining the vision and long-term outcomes

  • Define the desired outcome
  • Establish a robust policy framework with political buy-in
  • Define best value criteria including whole life planning; capture economic, social, environmental and indirect benefits
  • Establish project governance

Scoping: Building the brief

  • Establish the roles for public sector and private sector
  • Ensure sufficient human and financial resources to deliver
  • Commercial implications; ensure a public-private approach is a sustainable investment
  • Establish public sector red lines, including returns, risk and commercial exposure

Reviewing partnership options

  • Early, informal market engagement to gauge private sector appetite and depth
  • Consider best value and commercial implications across investment options
  • Legal and commercial advice on Subsidy Control (formerly State Aid)
  • Stress test forecasts and budgets
  • Consider delivery and control mechanisms, facilitated by each option
  • Ensure the level of participation is substantiated within the policy framework

Identifying and choosing the right route to market

  • Legal and commercial advice on procurement routes - and whether procurement is strictly required
  • Review options for using existing frameworks versus a new process
  • Prepare the organisation to demonstrate confidence to the market, able to respond to queries. swiftly and clearly

Effective preparation and making a strong start

  • Tax, accounting and subsidy control advice when negotiating commercial terms
  • Governance with the partnership and consideration of mechanisms for public sector oversight and delivery control; ensure clear rules for dispute resolution and negotiation
  • Prepare procurement documents, including legal agreements; be clear on scope
  • Define risks and mitigations clearly and key lines of accountability with the partner

Managing the partnership in its steady state

  • Secure committed resources to manage contractual obligations and relationships
  • Continual financial and risk management
  • Keep the original objectives in mind but flexible to change in approach
  • Ongoing value and KPI monitoring e.g. re-financing opportunities

Finishing well and moving on successfully

  • Whole life project evaluation
  • Planning for wind-down / handover learning lessons from PFI contracts today

PPP structures and relevance for today's challenges

Selecting the right partnership option is a key step to success. Partnerships can take many forms across the spectrum of project types and sectors, and need to be designed around the project objectives, risk appetite and level of participation between the parties. The characteristics of the partnership will need to both maximise the council’s strengths and draw on the private sector for the resources and input required, be that financing or delivery and operational capacity or technical expertise.

Here we outline the principles of the most widely deployed structures, from contractual agreements to corporate partnerships, as well as lighter touch co-operative working arrangements and how they can be practically applied to address local government challenges.

Corporate Joint Ventures

JVs are increasingly deployed for high capital and high-risk projects which need a degree of flexibility and where outcomes cannot be quantified at the procurement stage. They deliver single projects, such as Westminster City Council’s JV at Luton Street, or longer-term multiple project partnerships such as Wirral Growth Company (see case studies section).

In essence, a corporate JV sets up a SPV to deliver the project. The JV company itself can take many for-profit and not-for-profit forms, with differing tax and legal treatments. As such, legal and taxation advice should always be taken prior to designing and committing to the corporate structure. 

The JV as a corporate entity is able to raise third party finance and, rather than provide capital, councils can use their land as their equity share in the JV subject to the valuation. Project costs, development risks and profits are shared, and the council receives returns in line with its ownership of the JV.

JVs are the most integrated form of partnership working. The JV agrees to a shared vision, objectives and performance criteria within its Business Plan. Subsequent decisions are agreed by a JV Board comprising both parties, with mechanisms in place where decisions cannot be jointly reached. JVs usually see each party to the JV perform other roles, for example in a housing development, the JV may employ the developer partner to provide development management services for a fee. It is important to maintain a separation between these roles in providing services and the equity position within the JV itself.

The table below presents a selection of challenges and opportunities of corporate JVs for local authorities.

Opportunities

Challenges

  • Local authorities can retain control over the delivery of projects and share in growth over time
  • Risk of public perception of the ‘privatisation’ of public assets 
  • Greater control over the nature of development and greater certainty that outcomes will be delivered by ‘having a seat at the table’
  • Resource intensive to set up and manage - requires capable and dedicated resources from both partners
  • True partnership with shared objectives, resources, expertise and finance
  • Often more suited to larger, more capital-intensive projects due to the resources required to establish the JV
  • Flexible structure that is suitable for long-term projects that will move through market cycles
  • More challenging to wind down or terminate the JV at the end of the project or in the event of dispute

 

Application to current challenges:

Corporate JVs are well suited to strategic place-based regeneration schemes where there is significant scope for change and potential for the public sector to capture value growth over time. It also enables the public body to drive delivery where a scheme is strategically important for housing, job creation, and health and wellbeing. Some notable examples include Argent-Related and London & Continental Railways at Kings Cross, Greater London Authority and London & Quadrant at Barking Riverside and Manchester City Council and Far East Consortium for the Northern Gateway project.

Corporate JVs can be a helpful structure to deliver capital intensive energy projects such as heat networks which rely on an integrated approach to design, commissioning and operation. Such models are also attractive to private sector partners who seek to de-risk investments rather than adopt a full risk transfer under a contractual or concession model (see below).

Public Sector PLC noted that partnerships can be mobilised to facilitate activity in a shorter timeframe that might otherwise be possible. Clear action on the ground can give confidence to others, spearheading spin-out or complementary activity. In this way, councils should look to the ‘package of returns’ that a partnership can offer beyond direct financial benefit, such as employment growth and increased tax base.

Contractual Partnerships

Contractual partnerships are more focused on the delivery of specified outcomes. Whilst corporate JVs permit a degree of flexibility over time, contractual partnerships and concession arrangements are suitable for clearly defined projects and for time-limited tasks. A key benefit is they can allow a greater degree of risk transfer to the contracted party.

Contractual partnerships vary in execution but have similar characteristics: The delivery party takes the risk of delivery and the profit; however, the public sector can also elect to share some of the risk if this has the potential to generate better value overall. In place-based regeneration for example, the public sector can incentivise the private partner through deferred land consideration or agreeing a minimum land value and sharing the performance above this level whilst allowing a percentage return for the developer.

Opportunities

Challenges

  • Relatively easy to procure and contract – in comparison to contractual JVs
  • For asset delivery a loss of control over specification, quality, and timing of delivery
  • Clear and understood contractual structure for the private sector to see and understand through procurement
  • Less suitable for programmes with multiple projects as multiple contracts are required for each
  • Transfer of risk from public sector to private sector
  • Risk of regular renegotiation of the contract in cases of scope change, which causes delay and costs in professional fees
  • Greater certainty for the public sector in terms of known outcomes or values to be paid

 

 

Application to current challenges:

In the energy sector, Energy Performance Contracts (EPCs) represent an agreement to deliver energy savings and/or energy generation with a view to producing guaranteed energy savings, reduction in maintenance and other costs. This creates the opportunity for renewable energy generation and income from renewable heat incentive schemes, reducing the impact of future energy price rises by reducing energy use and improving building performance. The scale of authority assets – especially if contracts could be pooled – provides an opportunity for developers and investors. An example of a delivery model could involve the investor providing upfront funding to deliver the retrofit programme for existing homes on the authority’s behalf in exchange for sharing the energy savings generated.

Bristol City Council is spearheading the PPP approach to delivering a wide-range of low-carbon assets through its Bristol City Leap Project. Bidder interest have shown confidence in the private market to partner with councils to share in the financial and delivery risk. In a similar vein, Oldham Council has recently launched a strategic infrastructure partnership to tackle carbon emissions across its estate through delivering renewable energy solutions with a partner.

The Re:fit programme has been designed to support such energy efficiency programmes. Re:fit is a procurement initiative for public bodies wishing to implement energy efficiency measures and local energy generation projects on their assets, with support for the development and delivery of the schemes. Initially developed by the Greater London Authority (GLA) in 2009, the framework uses a robust, flexible, and tested EPC approach. It provides a guaranteed 100 per cent of the energy saving or generation (kWh) via a contractual agreement for the payback period of the project, this key feature is helping to remove risk of failure with new developments, plus protecting the client and their investment. The current (fourth) programme of the Re:fit framework, has been procured and run by a partnership of the GLA and Local Partnerships. It uses a competitively tendered and OJEU-compliant framework comprising energy service companies ESCos.

Electric Vehicle (EV) charging is a growing sector that authorities can capitalise on. The likes of EDF, BP and SSE are seeking opportunities to install and/or own the assets. There is the potential for authorities to use their land to deliver on its own or in partnership with the private sector EV charging stations. New delivery models are continuing to be developed opening up the potential for authorities to either invest over the short or long-term.

Investors are looking at opportunities to maximise commercialisation of energy and energy providers have not surprisingly gone into the installation and operation of energy assets, such as EV charging: Pod Point from EDF and Charge Master from SSE. Private wire arrangements can be brokered between the public sector and private investor whereby the investor develops renewable energy projects on or near public sector sites and sells the electricity directly to the end users by-passing the grid or indeed by the public sector itself to provide cost price energy to residents subsidised through the margin charged to the private energy purchaser.

To keep pace with growing demand for EV charging in the North East of England, 12 local authorities have launched a shared procurement framework on NEPO to deliver region-wide infrastructure. It will deliver a long–term partnership for EV concessions across the North East of England.

Power Purchase Agreements (PPA) also represent a growing area of contractual agreements between energy providers and local authorities. In November 2020, the City of London Corporation entered into a PPA with Voltalia for a 49MW solar farm in Dorset, which will allow the authority to benefit from renewable energy from the new-build 95,000 panel solar farm for 15 years. The £40 million green energy deal is understood to be the first PPA signed directly between a governing authority and a renewables producer, and is expected to save the City Corporation around £3 million in energy costs over its lifetime, and provide half of its electricity demand. It will help to power building such as the Corporation's historic Guildhall headquarters, three wholesale markets and the Barbican arts centre. PPAs offer the advantage of authorities directly supporting the delivery of new renewable infrastructure without the technical, land, planning and delivery complexities that come with developing new infrastructure directly adjacent to authority assets.

The private sector is increasingly looking for opportunities to work with the public sector to deliver against their environmental, social and governance (ESG) frameworks. There is untapped potential here and councils should look to draw on the expertise within the private sector to respond to ESG objectives. Some private sector partners are willing to take on a greater level of risk – or gap fund – a project where it can directly deliver against their ESG framework, such as district heating and fibre broadband rollout.

In the context of place-based regeneration, contractual arrangements such as Development Agreements and land disposals with deferred consideration are well-established and understood. They can also allow an authority to take assets in lieu of land value, for example, if a local authority chooses to not take a land receipt upfront and the developer provides an agreed quantum of affordable housing or commercial space at the end of the construction period.

In terms of delivering wider social infrastructure, the Welsh Government has developed the Mutual Investment Model (MIM). MIM which bears some of the hallmarks of PFI insofar as it involves the use of a special purpose vehicle to deliver and operate the asset, and it is financed by the private sector with the public body making payments over the life of the contract and receiving the asset at the end of the term. However, unlike most PFI projects, there is also scope for some funding to come from the public sector and the Welsh Government is a minority shareholder (capped at 20 per cent). This provides a greater level of oversight to ensure social obligations are fulfilled and assets are maintained as planned. It also enables the Welsh Government to share in profits generated in the SPV.

Investment and Financing Solutions

Investment models used for student accommodation and retail assets have started to make in-roads into council PPPs. Lease-leaseback models attract much interest from institutional investors who are looking for stable and long-term income and can fund and deliver assets. Subject to terms, the model provides a guaranteed index-linked income to the investor, typically over a 30-to-40-year period, and it delivers a council asset on leased land at no cost to the authority. At the end of the lease period, the authority has the option to acquire the asset back from the investor for a nominal sum.

Institutional investors are increasingly interested in deploying this partnership model with councils in light of their covenant strength, ability to enter into long term contracts and strong ESG credentials.

A key benefit of this model is that investors will approach the transaction as a land and funding deal rather than contract for services, which can mean that contracts can be entered into without the need for a procurement process. However, legal and procurement advice should be taken on these matters and, regardless of procurement route, authorities are still under an obligation to demonstrate that the transaction represents best value.

This model can deliver new assets such as social rented accommodation, or release capital for current civic assets. However, in considering this structure financial stress testing should be taken on the whole life term as index-linked lease payment can become very high towards the end of the period. The table below summarises some of the key opportunities and challenges. 

Opportunities

Challenges

  • Investor partnerships reduce the need for council to borrow upfront, reducing strain on borrowing capacity 
  • Risk that net rental income does not keep pace with upstream lease payments, creating a net cost to the council
  • Asset reverts to the council in the long term, benefitting from capital appreciation
  • Perception risk of the private sector ‘owning’ affordable housing assets
  • Subject to legal and procurement review, can be achieved without lengthy procurement process
  • Negative publicity surrounding lease-based transactions particularly amongst supported living housing providers in the regulated affordable housing sector
  • Significant interest from institutional investors to work with local authorities on long term investments with strong ESG credentials
  • Limited ability for councils to influence the design and specification where a services-based procurement route has not been followed
  • If managed appropriately, there is a potential for the council to generate a profit rent for re-investment
  • Long-term debt sits on the council's balance sheet

 

Application to current challenges:

In the case of rooftop solar, investors would take a long-term lease, ideally in line with the useful life of the asset (c. 25 years), fund, install and operate the solar panels. The authority would agree a price for the energy generated which would power local housing, commercial stock, and council buildings. Having a private partner roll-out and operate a solar installation programme transfers the risk, cost, and maintenance to the private market, whilst providing green energy for residents.

Lease-leaseback or ‘income strip’ models are also applicable for the development of new affordable homes. Such models are attractive for ensuring that homes can be delivered without the authority drawing debt during construction; however, when the authority enters into the shorter-term lease, the obligations are ‘on balance sheet’. Furthermore, the lease payments tend to be index-linked which is a risk when income from the underlying asset is subject to changes in rental indexation from central government.

Councils with the ability to borrow either through Public Works Loan Board or other facilities can benefit from lending to private partners to enable projects where traditional lenders might introduce conditionality which causes delay. There are multiple examples of this including Lambeth Council lending to Muse to deliver the New Town Hall and residential scheme, and Westminster City Council lending to its JV with Linkcity to deliver the Luton Street residential scheme (see case studies section).

Following the sale of the government-run Green Investment Bank in 2017 and the post Brexit move away from the European Infrastructure Bank, the government has established the UK Infrastructure Bank (UKIB) with a key role to play in financing infrastructure. UKIB is government-owned and focused on working with private sector partners and local government to finance sustainable projects and support levelling up. It will provide a range of financing tools including loans and equity investments for projects that meet its four investment principles. Although still a relatively new entity (launched July 2021), UKIB has closed a deal to invest £100 million to provide 250,000 homes with ultrafast broadband across rural areas of the South West, the Midlands and South East. This investment facilitated £90 million of private sector investment from ABN Amro, ING, Lloyds Bank, Natwest and NIBC. In December 2021, UKIB also announced proposals to invest up to £250 million in a private fund seeking to double the amount of subsidy-free solar power in Britain. It is evident from these two projects that there is a role for UKIB to finance challenging projects and to de-risk opportunities enabling sponsors to leverage private finance.

The LGA prepared a practical guide to raising finance for green initiatives, which includes a range of private finance options.

Co-operative Partnerships

PPPs can be used to positive effect in delivering the policy ambitions that local authorities have set through local planning policy. Often an authority has access to land and planning powers (including powers of compulsory purchase) but lacks sufficient financial capital and human resources to deliver a scheme. Even where an authority does not own land, there are ways that they can intervene to use their powers to achieve wider policy objectives.

Application to current challenges:

An example of delivering policy ambitions through lighter touch policy intervention has been seen by the Greater London Authority in its use of CPO powers to support Berkeley Homes’ land assembly process to deliver 3,750 new homes at Southall Gas Works.

Private sector businesses and investors own much of the real estate in our town centres; local authorities should work collaboratively with these landowners to make the most of their assets which promotes the vitality of the town centre whilst also supporting the investment interests of the investor. Over the last 12 months, there have been announcements from major shopping centre owners Land Securities and British Land plus the retailer, John Lewis, of their plans to move into private rented accommodation. These homes could either be developed on a standalone basis without supporting infrastructure or amenities, which would be negative for both local authorities and the investors. Alternatively, through collaborative working, the new homes could be delivered into an active high street with supporting outdoor space and social amenities which are more likely to drive better rates of tenant retention and rents for the investor. It may take a bit longer to get there but the long-term benefits far outweigh the costs.

Less formalised PPPs can be used to deliver against core social ambitions. Camden Council has a Memorandum of Understanding with companies such as Google, Facebook and Amazon as well as a number of universities and other institutions to deliver skills training workshops and other services to Camden residents. The Google Careers Certificates Programme offers flexible training course in four high-demand tech courses, with over 350 participants having benefitted from the opportunity so far.

Conclusions

The process of investigating market activities and speaking with key practitioners and influencers across the public and private sectors to develop this guide has illustrated that, whilst challenging, PPPs can play important roles in delivering key assets, infrastructure and services across the UK.

This guide opened with an acknowledgement that we are amidst a new and very different economic era, characterised by sustained and significant environmental, economic, and social uncertainties and a pressing, overarching drive to deliver a greener and fairer economic recovery. In the face of these challenges, councils are demonstrating ambition, agility, and incisiveness in their approach to shaping investment and development. This is reflected in the breadth of the aims of the new partnerships being formed and the outcomes being delivered.

At their best the opportunities presented by PPPs to combine the different competencies and resources of the public and private sectors in a coordinated and complementary way are significant and could not (or would not) be replicated by either party in isolation. However, significant effort, resources and preparation are required by all partners - and at all stages of the partnership’s life-cycle - to fully realise these opportunities.

By embracing the steps and principles set out this guide and by learning from the practical experiences and expertise shared by the contributors to it, councils will be better placed to design and deliver effective partnerships that are vehicles for change, delivering both value for money and tangible, targeted impacts that matter to their communities.

Further reading