Cards on the table19 July 2012
PPP Journal reports on Reform's summer roundtable events, which attempted, with mixed results, to give UK infrastructure a sense of direction…
Building on its event headlined by Infrastructure UK Chief Geoffrey Spence (covered in PPP Journal 76), vogue Westminster think-tank Reform continued its strand of work exploring infrastructure and partnerships with two key roundtable sessions in May and June.
The first, a policy discussion conducted in the same vein as its earlier roundtable with Spence – under the Chatham House Rule – welcomed outgoing Balfour Beatty Deputy Chief Executive Anthony Rabin as the billed main speaker. Rabin, who was previously Managing Director of Balfour Beatty Capital and responsible for the group's buoyant PPP business, recently wrote an essay entitled 'PFI 2.0', published in a special collection marking Reform's 10th anniversary.1
As this article reveals, Rabin is clearly extremely cynical about the PFI model's reputation crisis and the rhetorical bombardment dished out by politicians, stating: "At its most superficial level, any programme that could be used to produce a vision of financiers making money out of the emotive sectors of health and schools in an environment of a global financial crisis brought about (apparently) by those self same financiers was manna from heaven for any politician wanting to thump the tub."
Rabin also mounts a comprehensive defence of the model, citing its record of building projects on time and to budget, praising its ability to accommodate whole life cost and risk, and challenging criticism of operational costs as selective. Finally, the essay sets out some suggestions for improving the model, ideas that were debated at May's roundtable.
Rabin's first suggestion is to tackle the lengthy and wasteful procurement process associated with PFI. Roundtable attendees highlighted a need for better preparation and project management by procuring authorities. One speaker suggested that sending public servants to school to learn this skill – a reference to the Major Projects Leadership Academy – was 'a tad naive'. Leveraging the scale of multiple projects by 'bundling them together' was proposed as a meaningful way to save on the transactional costs of PFI deals. Beyond the procurement phase, participants perceived a preoccupation in the public sector with risk transfer, with the consequence that procurers' genuine desires are ignored. A clear consensus emerged around the table, even amongst those that were sceptical of the development of 'PFI 2.0', that there are both canards and common sense floating around in the infrastructure finance debate. The universal worry is that discussion and argument will continue ad infinitum with a persisting deficiency of real action.
It's probably fair to assume, therefore, that the delegates attending Reform's second event, a major policy conference on 'Building Confidence in Infrastructure', were hoping to hear Business Secretary Dr Vince Cable confirm that positive action is being taken on infrastructure financing by government. Cable was quick to acknowledge the scale of the challenge: "There is an increasingly wide understanding, particularly in the business community, that in key respects British infrastructure is deficient and is an obstacle to long-term growth and prosperity." After spending much of his speech analysing why infrastructure delivery isn't straightforward, Cable laid out the government's action on the issue. To supplement the National Infrastructure Plan, the Cabinet has set up a sub-committee monitoring the progress of 40 highlighted schemes that it is determined to deliver.
There has been, according to Cable, a change in the "culture" of procurement to break a tendency to think "non-strategically" and "buy off-the-shelf". While both of these developments may have been music to delegates' ears, funding and finance was the burning issue, which Cable approached with care. "We are constrained as a government but within this context we have taken various initiatives designed to help break the difficulties of funding," he explained. "One is the Green Investment Bank, which will take the big risks in waste disposal, energy efficiency and offshore wind. Eventually, the hope is that institutional investors will invest in projects once they are built, but to get them off the ground involves high construction risk. We are also sitting down with the pensions industry to try and create a platform under which it will be possible for them to invest in a significant scale in infrastructure." Cable stopped short, however, of providing any clue on the type of new financial model needed to act as conduit for this form of investment.
While Cable's keynote speech failed to provide delegates with fresh enlightenment, the next presentation by University of Oxford Economist Professor Dieter Helm did supply a uniquely cogent insight on the current situation. Helm argued that the seemingly continual policy review without resolution is not the result of a lack of ambition by key players, but due to an inability to jump through 'fundamentals', which he went on to set out:
•A conservative estimate of the infrastructure aspirations of the political parties indicates a spending requirement of circa £500bn by 2020 just to maintain infrastructure fit for purpose for a 21st Century economy;
•The market will not 'just do it' because of lack of certainty of repayment. Infrastructure involves large capital outlay but is inexpensive to operate. The market fears that politicians, during the operating period, could force companies to price infrastructure at its 'efficient' cost, meaning that original capital costs could not be recovered. The market therefore needs a commitment that investors will be paid back, something that is impossible to guarantee in a democracy as it is never certain the electorate will support a party that will make taxpayers reimburse investors. However, for the financial models, the Regulatory Asset Base (RAB) is the form of contract that gives most assurance and allows the best value cost of capital;
•Infrastructure does not advance because borrowing must come from savings. Britain cannot pay for its own infrastructure needs, as the nation's savings ratio is so low. In order to address the shortfall citizens would have to accept a drop of around 25% in living standards to raise the savings ratio to the required level – a bitter pill to swallow for the electorate;
•The alternative option of foreign finance is equally unviable, as repayment would require an increase in billing, which would similarly equate to a 25% drop in living standards – again a politically toxic prospect.
Summarising his arguments, Helms concluded: "It's unsurprising that we have been debating infrastructure for 20 years and putting on sticking plasters because until we address the fundamental issues and pay for the infrastructure we aspire to have, not much will happen. My outlook is gloomy; we'll go on muddling as we are, there will be new wheezes and schemes, the overseas money will disappoint and there is no easy way out."
Reform is a fashionable think-tank for a reason. The organisation's work always seems to have a topical flavour and recommendations to policymakers are usually brave and progressive. The recent events were a good attempt at breaking the current deadlock on infrastructure finance; nonetheless, with Cable's reluctance to give any fresh direction and Helm's rather depressing prognosis, the frustration vented briefly by industry figures at May's roundtable will continue to build.
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