As Britain slowly emerges from recession policymakers are faced with the challenge of maintaining a recovery while addressing a deficit that could damage the long-term interests of the country. After the collapse of Lehman Brothers it was clear that nothing was going to be the same again. Government spending and procurement models such as PFI were all going to be rigorously questioned for their cost-effectiveness and value for money.
In the last year, ACE had been giving careful thought to these issues. Clearly, it is in the public interest to have robust infrastructure. Given the climate change targets that Britain has committed to it is important that the UK moves to a low carbon economy. This inevitably means new sustainable infrastructure projects, as well as decarbonising existing infrastructure and housing stock. Investing in infrastructure and better sustainable buildings also makes economic sense. It has been suggested that, for every £1 invested in construction, the public purse sees a return of £2.50. But where will that £1 come from in the current environment?
The first challenge is to identify what UK plc has and what it needs. Conducting an infrastructure audit is the first step in this process to creating a national infrastructure account (NIA). The NIA would provide the statistical base to inform a high level blueprint for future capital expenditure in the same way that a business uses its balance sheet to understand its performance and how and where it needs to invest to maximise yield and value. The data collected would then enhance the government, industry and public’s comprehension of the infrastructure gaps that hinder economic activity.
Once this is done, policymakers will need to develop various models to ensure a consistent investment stream. This could be done by traditional government borrowing, an infrastructure bank, tax incentives, the creation of infrastructure gilts, through a re-modelled PFI mechanism and the creation of a regulatory asset base (RAB).
The RAB would allow investors a fixed return on their venture in addition to depreciation allowances which in effect represent the eventual return of capital. This reduces investor risk through a fixed regulatory framework and more transparent and lower average costs of capital, potentially saving billions of pounds. This would encourage extensive investment by pension and insurance funds that are looking for secure long term yields.
The RAB can therefore be viewed as a more efficient long term ‘infrastructure contract’, which defines the obligations of all parties and could encourage a balanced and mutually beneficial approach to investing in the UK’s infrastructure network. UK plc would ultimately be in a position to emerge from the recession stronger and more prosperous.
* Nelson Ogunshakin is chief executive of ACE (Association for Consultancy and Engineering). ‘The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers: please email v[email protected] if you’re interested in contributing.
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8 Comments
The UK is not a plc and it’s not remotely helpful to think of it as one. Of course, I’d already been put off by the implication in the first paragraph that until the collapse of Lehman Brothers nobody doubted the “cost-effectiveness and value for money” of PFI. Plenty of us had long since spotted that the pig in that poke was mewing.
Government spending and procurement models such as PFI were all going to be rigorously questioned for their cost-effectiveness and value for money.
When PFIs were introduced we were told the involvement of the private sector in them would mean they get rigorous checking for cost-effectiveness and value for money, that was meant to be the point of them.
So, if didn’t bring this rigorous checking – as anyone who is saying it will now be done is implicitly saying – who will own up and say “OK, what we told you when these were introduced was wrong”? We won’t get anywhere until we have this level of honesty where stakeholders are willing to admit they got things wrong and willing to look at why. How can we believe anyone promising to do it this time, when their very promising it implicitly means they got it wrong last time? If you get things wrong, the first step is to find out why. That’s basic engineering principle.
I observe that a consultancy executive’s “solution” to the economic problems is for the government to do a lot more consulting. And also to invent some new TLAs.
This observation is unsurprising.
…and lots more central planning. Oh dear!
The real answer as to where infrastructure financing should come from, is, of course, to wholly implement LVT so that economic activity pays for its own infrastructure by recycling the benefit in land values that accrue from that infrastructure investment. And it avoids so much central planning.
Agree with Jock. This article is a red herring. PFI and the culture behind it were part of the problem – borrow off-sheet and hiding responsibility in complex legal-financial instruments. If you want local authorities to borrow privately to finance projects, then a) give them the power to do it and b) implement a LVT that gives them the financial security to borrow against future earnings at low rates. Simples.
One of the best things the Lib Dems could possibly do is to call for a “post mortem” into the PFIs (because dead is what the idea of PFIs should be).
It is one of the most conspicuous failures of current political thought that (a) the bulk of the political establishment is in denial that private sector involvement in formerly state-run activities has largely failed and (b) few mainstream politicians have the guts to admit that direct borrowing by public authorities and contracting under their control is actually more cost efficient.
However, should the Lib Dems initiate something like this, you can be sure the two big parties would be the first to howl it down as “communist nonsense” before moving in to steal policies for themselves when they realised they actually made sense.
Sigh!
What Jock and Mark said with bells on.
I note the author at least listed “tax incentives” amongst his list of interventionist remedies. There is, of course, no greater incentive to enterprise, productivity and investment – especially infrastructure investment – than LVT, replacing both deadweight taxes and distorting subsidies.
Robert C
It (PFI) is one of the most conspicuous failures of current political thought that (a) the bulk of the political establishment is in denial that private sector involvement in formerly state-run activities has largely failed and (b) few mainstream politicians have the guts to admit that direct borrowing by public authorities and contracting under their control is actually more cost efficient.
Yes, when I was Leader of the Opposition in LB Lewisham, the council being mad keen New Labour was pushing PFI with a missionary zeal, and I remember looking at it, and thinking it just didn’t make sense, I could see so much wrong with it and so much more potentially wrong with it. Essentially it seemed to be based on some sort of hocus-pocus, in which “private sector know-how” would magically transform things. The reality, it seemed quite obvious to me, was that it was something we would deeply regret as we saw it pan out long-term.
With this as with much else, I only wish I was more vocal and trusting of my own instincts than I was. It wasn’t easy to put the case against, when the response thrown back at me was inevitably extremely patronising, suggesting I was just some ignorant hick who didn’t understand high finance. The same people were, of course, also telling us they’d cured boom-and-bust. I didn’t believe that, and privately arranged my own finances under the assumption the bust would come in 2007.
You may detect a certain bitterness in my comments on politics and wealth now, when I never got paid anything except a few thousand councillor’s allowance (but I did save my skin in the bust) for getting things right, when so many people were paid very handsomely for getting things wrong.