Thinking long-term: the government’s alternative to PFI

Back in February I wrote about the government’s aim to think long-term and the problems with turning that rhetoric into action:

“We must think long term” is a common cry in politics and government. Far easier said than done, but whether it is investing in early years education, making decisions over building new physical infrastructure such as railways, setting rules for pensions or a myriad of other decisions, government repeatedly makes decisions which only work well if they are stuck to for a long period of time and whose positive impact may not be directly felt for many years. For example, the failure to make decisions for the long-run and stick with them is one of the reasons infrastructure projects cost more in the UK than elsewhere

Moreover, Labour’s one serious attempt to get long-term planning for infrastructure work – PFI and PPP (which, by using legal contracts, made it hard for governments to change their mind over projects) – has been heavily discredited for high costs and post work in many cases, including the notorious collapse of PPP on the London Underground.

Now it looks as if the government has found its alternative to PFI/PPP for sustained long-term funding of infrastructure work: getting the pension funds involved.

As the BBC reported:

The aim is for government and private investors to support both social and economic schemes over the coming decade. The government will provide £5bn up to 2015-15, then a further £5bn in the next Parliament.

The Treasury hopes two-thirds of the £30bn earmarked for infrastructure schemes will come from the National Association of Pension Funds and the Pension Protection Fund. Separately it is also seeking more investment in infrastructure from insurance companies and from China.

Good news.

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  • The govt can currently borrow money at ~2%. Why would we as taxpayers want to pay more than this to pension funds? Or the Chinese (who described the current plans as “lucrative” in the FT? If it is lucrative for the Chinese, it is bad value for us. The only exception would be if material risk was being transferred – but there is no evidence of that.

    This looks to me like a form of smoke and mirrors, which will cost taxpayers dear.

  • Mixed feelings. @Tim, that rate we can borrow at is based on how much we are borrowing. If we borrow a lot more, that rate ultimately would rise. Also, where geographically do we want pension funds to invest? It would be nice if a bit more pension cash flowed around the UK economy rather than disappearing abroad.

    We could also have (without spending more) a more sophisticated political model for capital spending decision making which sought all party support to cut risks and promote long term planning and continuity from one administration to the next. Debacles like the aircraft carrier procurement and building schools for the future shouldn’t happen as often as they do.

  • Alastair – the sums we are talking about here are trivial compared with the stock of outstanding debt. As the US shows, if the markets like you, you can borrow a lot without affecting the rate you pay. Furthermore, if we sign something with China that requires us to pay them, then sooner or later that will affect our ability to borrow conventionally. Smoke and mirrors never work.

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