The chancellor’s review of infrastructure financing must include social infrastructure to avoid leaving the industry in the dark, says Stephen Johns.
Last month, Philip Hammond launched the Treasury’s infrastructure finance review, seeking new ways to privately finance public infrastructure projects. The consultation considers that half of the UK’s £600bn infrastructure spend will need to be financed by the private sector over the next ten years. It’s been billed as a means to access the technological innovation needed to take Britain’s infrastructure into the future. Big data, autonomous vehicles and superfast broadband all receive namechecks, but there is a striking omission.
The review expressly focusses on “economic infrastructure” such as transport, energy and broadband, but does not cover “social infrastructure” like schools and hospitals. When it comes to finance, a key difference between the two is that economic infrastructure typically has an identifiable funding stream associated with it. Consumers or other users can be charged for access to a relevant asset, such as, for example, a rail, or broadband network. This facilitates the use of private finance through various models. Social infrastructure, by contrast, is generally provided by government to members of the public free of charge. The only funding stream, therefore, is the state.
Which brings us to PFI. While the use of PFI has been in decline for some time, the chancellor’s announcement in the 2018 budget that he would not approve new PFI projects took many by surprise. Immediately before the announcement, the Treasury was still encouraging local authorities to consider PFI as a financing method, and two of the largest projects in the country - the Lower Thames Crossing and the A303 Stonehenge tunnel - were openly being promoted as privately-financed schemes. The NAO has since noted that there is not yet any alternative financing proposal for those projects.
Any scepticism about the chancellor’s announcement and suspicion that PFI would simply be resurrected under a different name is undermined by the review. The consultation document makes abundantly clear that the review will not entertain alternatives with the same characteristics as PFI.
The official retirement of the model came after widespread concerns were raised about its suitability. PFI is more expensive than traditional procurement, and often too inflexible for the long-term requirements of public sector projects.
However, there has also been a recognition that government lacks suitable data to measure the advantages and disadvantages of PFI. Building on observations made by the public accounts committee, last year the NIC proposed an analytical framework to evaluate private financing, both qualitatively and quantitively. There isn’t any mention of it in the consultation, but the framework could be an effective way to measure the performance of PFI projects and inform the design of a replacement.
The consultation itself recognises some of the benefits PFI can deliver, including better risk management and project discipline. It stresses, however, that the benefits of private capital cannot outweigh the additional cost to the tax payer. This is a sensible thought process, but the challenge now is to find an alternative to PFI that will support the country’s infrastructure ambitions.
Even though PFI had well documented issues, ignoring models that borrow from it completely is short sighted. And the absence of social infrastructure from this review leaves the industry in the dark about whether government sees a role for private finance in this sector in future.
Stephen Johns is a partner in national law firm Weightmans’ built environment practice.