The infrastructure plan in today's Autumn Statement looks suspiciously like a way to transfer more risk back into the public sector
Some £30bn of public investment will be announced in the Chancellor’s Autumn mini-budget this afternoon. The plans have been well-trailed in the media but there is an unusual degree of vagueness about what is being proposed.
A list of investment projects – mostly new roads and rail improvements – has been released by the Treasury, and there is talk of sourcing £20 billion capital from pension funds and Chinese sovereign wealth funds. But how these investors are to be brought into projects is not clear.
The answer, perhaps, lies in the Treasury’s decision earlier this month to review and reform the Private Finance Initiative, hitherto the main way of bringing private sector money into public capital projects.
The review is a significant U-turn for the Treasury, which has fiercely defended the coalition government’s use of PFI and championed its value for money credentials.
In total, 34 PFI projects have been given ministerial approval since the coalition was formed in May last year, with 49 additional projects in procurement. These deals have a combined capital value of £7 billion – serious money. And new PFI programmes, like Michael Gove’s £2 billion PFI initiative to provide new schools, will add to that.
But change in some form is coming, it is now clear. The Treasury told a Panorama investigation into PFI deals, broadcast on BBC1 last night, that the review will see the 'end of PFI as we know it'. Finding ways of sourcing capital from a 'broader range' of investors – especially pension funds - is a major objective of the review.
These investors can provide lower-cost finance than commercial banks, but they have been frozen out of the PFI market since the financial crisis. Now, it seems officials want to find a way of transferring some risk back into the public sector to 'credit enhance' the deals, allowing associated bond issues to achieve the triple-A rating that institutional investors require.
The challenge, which has eluded successive governments, is to do this while maintaining PFI’s 'fiscal advantage' – its ability to allow investment to occur without the related borrowing showing up on the headline measures of government deficit and debt. This, after all, is the reason successive governments have found the PFI so irresistible. While the balance sheet benefit of PFI must be retained, there is a political imperative for change – even if it’s only a change of acronym.
Over the summer both the Treasury Committee and the Public Accounts Committee asked the government to undertake substantial reform – lowering profits for investors, reducing costs to the public sector, creating more transparency.
The Panorama programme last night – which Treasury officials have been worrying about since the BBC team began its investigation back in August – may have been the final straw. The key question is whether the reform will go far enough.
In its report, the Treasury Select Committee argued for increasing public borrowing to pay for projects, rather than incur the high long-term costs associated with the PFI programme.
The Treasury has rejected this advice, claiming it would put at risk its fiscal rules (unintentionally revealing the importance of the fiscal advantage to the Treasury, something it normally likes to keep hidden). But it remains a powerful argument.
As Martin Wolf has argued in the Financial Times, the government’s programme of fiscal tightening seems inappropriately inflexible in today’s uncertain economic climate, especially in the context of negative real interest rates.
Even The Economist, hardly a partisan for big government, has been arguing for months that raising borrowing temporarily might be sensible to boost demand, so long as a determination to control spending in the long term is demonstrated.
The Treasury is currently pulling its hair out trying to find ways of bringing pension funds into infrastructure investment. But the cheapest way to do this is, of course, to sell bonds to them.
They will currently buy them at a real interest rate of something like minus 3% - not bad for projects that will put people into work in the short-term and increase the economy’s productive potential in the medium and long term.
Mark Hellowell is the PFI adviser to the Treasury Select Committee
