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Public-private partnerships (PPPs), long-term agreements between governments and private-sector institutions, have long been global taboo – thought of as shadowy, exploitative configurations.
However, the UK’s ongoing focus on its green transition, Just Transition, and flagship ‘levelling up’ project requires additional capital – which indicates that there could be a shift in tides in order to fund these changes.
With the concept first introduced in the UK in 1999, the largest single PPP hospital contract in the country – the St. Bartholomew’s and Royal London project – was signed in 2006 and completed in 2016 for £1.1 billion. The UK remains the world leader in successfully completing these arrangements.
Given the increasing interest amongst investment teams, PPPs could soon find additional favour with insurers and government bodies alike. What exactly this shift will mean going forward is still uncertain, but insurance investment teams should note the changing sentiment.
Whilst PPPs have historically been controversial funding tools due to their association with privatisation – as well the secrecy and high costs that often come along with them – there are also many recognised benefits.
They enable the sharing of risk with then intentions of bolstering innovation, efficiency, and often performance. With the adoption of private sector technology – which is less regulated and can take more risks – PPPs can serve as speed enhancers that allow alternate sources of funding for public services.
Public-private partnerships, said Aileen Mathieson, Group Chief Investment Officer at Aspen Group, are offering new opportunities for investors to broaden their scope of impact and increase growth.
“Public-private partnerships will be able to provide new opportunities that
are complimentary to both environmental and social aims.”
She spoke to Insurance Investor after the events of Autumn 2022’s mini budget, LDI crisis, and general Trussonomics fallout, saying that “with the ever-increasing change for investors to allocate toward ESG-focused investments, public-private partnerships will be able to provide new opportunities that are complimentary to both environmental and social aims.”
Mathieson gave the examples of post-Covid urban regeneration programs – which necessarily focus on a wide spectrum of initiatives that require funding across businesses, including housing, education, transportation, and health and wellbeing.
She added that, going forward, PPPs will need to be delivered as “part of a comprehensive package” because “no one element can be successful on its own”. Some parts of the package require public finance – due to the high investor profile, longer payback period, and return options – whereas other aspects are more suited to private investment needs. This hybridity means that being able to blend public and private finance enables greater, more impactful investment opportunities.
However, these relations are not without their own unique difficulties – often practical considerations, with implementation being a real concern.
The question remains: how can PPPs best be facilitated to encourage tangible uptake? What structures can actually be invested in?
According to Mathieson, if these hitches can be worked through, the investment community can “play a valuable role” in facilitating the green energy transition and aiding social infrastructure processes.
A 2022 analysis from The World Bank listed the following categories as key areas of risk for PPPs:
The International Institute for Sustainable Development (IISD) said that risk allocation was a particular concern and key feature when dealing with public-private partnerships – with the potential for both pain and gain.
The organisation added, however, that PPP benefits outweighed challenges, a sentiment echoed by Sir Howard Davies, Chair of British banking giant NatWest Group.
“Insurance companies are a good source because they have long-term liabilities.
Not many investors are well placed to invest very long term.”
Davies recently told Insurance Investor that, despite risks, the UK needed more long-term capital-enabled infrastructure projects. “Insurance companies are a good source [for these projects] because they do have very long-term liabilities,” he added. “There are not many investors that are well placed to invest very long term in that way,” Davies continued.
In its report, “Risk Allocation in Public-Private Partnerships: Maximizing value for money,” the International Institute for Sustainable Development (IISD) affirmed the idea that PPPs were the way of the future for investors.
Still, PPPs represent a kind of privatisation that has historically polarised the UK public, alienating particularly those on the political left. New adoption – and gaining and maintaining trust – could be a hard sell for the average consumer who likely lived through the Thatcherite privatisation of national industry in the 80s.
One of the enduring key motivations on the government side, said the IISD report, was the “assumption that PPPs deliver greater value for money than conventional delivery methods.” It offered a few key guidelines for managing risk allocation, which included:
In 2021, the Insurance Development Forum – a United Nations-backed public-private initiative formed in 2013 that focuses on extending the use of insurance and its risk management capabilities to enhance disaster-prone community resilience and protection – said that PPPs were critical to addressing the global insurance protection gap.
It noted that the size of the gap was $162.5 billion in 2021, with developing economies accounting for $160 billion – or 96% – of that number. The report added that there was a significant mismatch between the commitment to protecting these communities and the funding model utilised to do so, which is why additional investment in PPPs was necessary.
Financing on standby to ensure that plans could be implemented with fast, evidence-based decision-making processes and risk awareness and reduction capabilities were strengths private entities could bring to the table.
Especially in the UK, with new Solvency II capital changes likely going into effect, insurance investment teams are gearing up for new PPPs around the net-zero transition and social infrastructure, such as education, healthcare, and housing.
“We want to go more into the sustainability environment, which has
been very heavily bank-financed for the past few years.”
Earlier this year, Tom Sumpster, Head of Private Markets at Phoenix Group, said that, as an organisation, Phoenix hoped to utilise freed Solvency II funds to increase social responsibility. “We want to work closely with the government and provide pensions with better return,” he said. “We want to go more into the sustainability environment, which has been very heavily bank-financed for the past few years, and offer different renewable opportunities.”
Paul Davenport, Finance and Risk Director at Lloyd’s Market Association (LMA), told Insurance Investor that since the implementation of Solvency II frameworks, insurers have significantly strengthened their governance models and risk management capacity – changes he was glad to see. “These are positive outcomes that are both good for insurers and consumers,” he said.
With the introduction of new cash into UK markets, insurance investment teams are particularly well positioned to engage in PPPs – utilising their speed, risk, and governance abilities to enable material outcomes.
In 2020, AXA also highlighted the impact of public-private collaboration as necessary to combat climate change. The global re/insurance giant warned against what it called “climate inaction”, noting that private investment in infrastructure – along with additional regulation – will be critical in reducing underlying risk.
This is especially the case in places that are disproportionately exposed to catastrophe risk, often developing economies that remain under-insured. The “protection gap”, said AXA, encompasses a widening gulf between the economic and insured losses stemming from natural hazards – now over $1.24 trillion, according to the Swiss Re Institute’s Resilience Index.
In developing economies prone to natural hazards – which home to more than 80% of the world’s most food-insecure people – this issue is particularly pronounced. However, underinsurance is also prevalent in mature markets, such as the US flood insurance market.
“The insurance industry should be part of the solution [given] its risk
modelling capabilities, risk expertise, and claims insights.”
The AXA analysis said that the most effective way to significantly improve disaster response from “reaction to prevention” was collaboration between governments, international organisations, and insurers.
“The insurance industry should be part of the solution, not just because of the re/insurance capacity it brings to bear, but also because of its extensive underwriting experience, risk modelling capabilities, risk expertise, and claims insights,” said Denis Duverne, Chairman of AXA and member of the Insurance Development Forum.
Duverne’s comments highlighted a common rhetoric that emphasises utilising the best of both worlds: leveraging private funding capabilities and public access opportunities. However, if the difficulties and secrecy of this dual approach come to fruition instead, consequences could include credibility risk and loss of capital. Insurance investment teams should proceed wisely.
