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It’s too soon to sound the PFI death knell

Britain needs to spend £200bn on its infrastructure, and with government budgets tight, it looks as though private fi nance will have to plug at least some of the gap over the next five years.

The funding requirement was set out in last October’s National Infrastructure Plan published by Treasury body Infrastructure UK (NCE 28 October 2010)

In recent years, the Conservatives have expressed strong opposition to the infrastructure PFI model − even though they had a hand in its birth. But they are reluctant to sound the death knell just yet, no less because they have not yet come up with a palatable and viable alternative.

Not that anybody has suggested this should involve either entirely − or mostly − money from the public purse. More likely, the existing PFI methodology looks set to be applied to the most pressing projects while an alternative was created.

Costly errors

But in the intervening months since October, criticism has been heaped on the value for money obtained by PFI projects. First up for civils was this month’s damning report into the Highways Agency-led M25 deal. The Commons Public Accounts Committee labelled it “flawed and biased” and slammed it for its resulting £1bn additional cost to the taxpayer (NCE 10 February).

The judgment offers little comfort for the future of PFI with the realisation that government agencies with as high a profile as the Highways Agency are capable of making, and are free to make, such costly errors as a result of committing a technical error.

The M25 assessment followed the government’s recent overhaul of − and attempted abandonment of − the largely privately funded Building Schools for the Future programme.

Seemingly acknowledging the PR crisis PFI was suffering, commercial secretary to the Treasury Lord Sassoon launched a pilot project

But this week the Treasury jumped in to potentially rescue PFI. Seemingly acknowledging the PR crisis PFI was suffering, commercial secretary to the Treasury Lord Sassoon launched a pilot project to identify the scope for savings in operational PFIs.

While necessary and potentially admirable, the pilot may be a drop in the ocean when it is considered that the public sector will spend over £8bn on PFI contracts in the coming year alone.

The choice of pilot project is some way away from core civils works − the Treasury will first examine the Queen’s Hospital in Romford.

But regardless, the Treasury said it would be examined by an experienced team of commercial, legal and technical advisors who presumably, will be doing the same job that was expected of a similar team advising on the same things in advance of the PFI being signed.

Poor alternatives

And it may yet be some time before a new, improved formula for PFI is developed. The difficulty is that in the meantime, alternatives are at best in their infancy and more often lack impact. While proposals for a Green Investment Bank have been adopted by all three main political parties, it is far from turning into a reality.

This spring is the due date for the design and testing of such a bank to be completed.

Business secretary Vince Cable recently admitted that while he wanted to see its development moving quickly, there are “frictions we just can’t sweep away”. Added to all this is the fact that the bank’s development has many stakeholders across government.

While proposals for a Green Investment Bank have been adopted by all three main political parties, it is far from turning into a reality.

As if to demonstrate this, energy secretary Chris Huhne last month said “it’s more important to get this right than to get it wrong and do it quickly”. The sentiment is likely to lead the industry to question whether the bank will be ready to welcome its first group of investments next year.

One potential silver lining in the near future may come from the community infrastructure levy (CIL). While seen as a distant cousin of the tax increment financing model used successfully in the US, it has less flexibility.

However, it does offer local authorities an opportunity to charge levies on new developments and use the money raised to fund infrastructure projects. The model has been seized upon by London mayor Boris Johnson to help Crossrail unlock funding and the recently proposed extension of the Northern Line to Battersea in south London.

One small detail will need to be ironed out though − how to bring business and communities along with the proposals. Some businesses say the rates are too high. Business lobby group London First certainly takes that view.

It will no doubt take time to convince the wider world that business will be required to foot the bill of developments. Particularly at a time when it has been difficult to justify vast public spending on infrastructure.

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