The infrastructure strategy opens the door to private finance

What’s that irritating yet undeniably familiar metallic rattling? Oh, yes, it’s the unmistakable timbre of a can being kicked down the road. And not for the first time…

That’s probably the most obvious takeaway from the vital private finance section of the infrastructure strategy announced last week. Yes, the strategy talks a lot about how to do more to attract institutional investors into economic infrastructure development, where there are already functioning finance models. But, on the key question of private finance for social infrastructure, it sends the can in the direction of a final decision at the autumn Budget.

And it’s not as if it is a particularly game-changing decision that is being delayed until the autumn. The options for social infrastructure finance under discussion look fairly limited – a long way from the new wave of PFI that some in the sector have been hanging out for.

And yet, such has been the taboo over using private finance models since Philip Hammond cancelled PF2 in 2018, that for some, even a glimmer of light represents a massive opportunity. So, what does the strategy say on private finance, and, crucially, how should it be interpreted?

Incremental change

While much of the talk in advance of the 10-year infrastructure strategy was around it being a plan for bringing in private finance to pay for public projects, the inevitable reality was that the document was largely focused on the delivery of publicly funded projects – £725bn of them over the next decade across health, housing, schools, energy, defence, justice, flooding: the list goes on.

As expected, one chapter of the strategy did deal with the question of private finance for public projects. But, while this contained many fine words, it is not the radical departure from the status quo that some in the construction sector would have liked.

Most of its 5,770 words documented largely ongoing efforts to attract investors into UK infrastructure, through courting pension funds and ventures such as the National Wealth Fund.

Inevitably, this is largely focused on investment in economic infrastructure in sectors such as water and energy, where under models such as the regulated asset base (RAB) and contracts for difference, private capital is already forthcoming in large quantities to pay for network upgrades and new power stations.

Investors in regulated sectors are particularly focused on the government’s review of economic regulation, which could improve the investment climate by ensuring that regulators are focused on economic growth. But, while the strategy flagged this work, it gave no hint of the outcome, so will in itself have done little to change the climate.

In large part, then, the document represents incremental not radical change.

In ‘limited circumstances’

What was truly new in the chapter, however, was a reversal of the government’s current de facto prohibition on public-private partnerships. While it did not detail the specific forms of partnership it will consider, as some had speculated, it said it will consider PPPs – presumably on a case-by-case basis – “where there is a revenue stream, appropriate risk-transfer can be achieved, and value for money for taxpayers can be secured”.

An example, it said, will be privately financing the Euston HS2 station project with some form of PPP.

The limitation of “where there is a revenue stream” appears to rule out projects in which the income to pay back any private finance came from the taxpayer, such as PFI-style structures. But, significantly, the strategy also announced a little something extra for social infrastructure that is reliant on taxpayer-funded revenue.

Here, it said the government will “explore the feasibility” of using PPP for taxpayer-funded projects in “very limited circumstances”, to pay for providing “certain types of primary and community health infrastructure” and delivering “taxpayer-funded public estate decarbonisation projects”.

Further work will be done between now and the autumn Budget on some very targeted potential applications of private capital for social infrastructure but, crucially, only where that provides value for money compared with it being funded by the state

Darren Jones, statement to the House of Commons last Thursday

The strategy makes clear that a final decision will be made on whether to go ahead with this at the time of the autumn Budget. Darren Jones, chief secretary to the Treasury said in the House of Commons that the government intended to consult further “on some of the design details”.

He added: “Further work will be done between now and the autumn Budget on some very targeted potential applications of private capital for social infrastructure but, crucially, only where that provides value for money compared with it being funded by the state.”

Clearly the language here around the use of private capital for financing social infrastructure is very cautious. If anyone was expecting a programme of PFI on the scale of New Labour of old, which funded over 700 projects with a capital value of more than £60bn, they will have had that delusion well and truly wiped away by this.

Opening the door

At first glance, you could say it looks like a pretty thin gruel. But this interpretation misses the fact that, with this strategy, something important has been achieved.

It is hard to over-state the level of institutional opposition to PFI built up within the civil service – principally the Treasury – since the model was cancelled. Understandably, officials who are all too aware of just how little day-to-day spending money is available to the Exchequer, are very wary of what they perceive as open-ended commitments to fork out more cash.

The UK already spends over £10bn a year on the PFI deals signed in years gone by, largely under New Labour.

But many in the construction sector point out that the arguments against have always been overstated, while the need to invest in the public estate has never been greater. And so, for many, even last week’s somewhat mealy-mouthed strategy represents a significant shift.

Insiders say that ministers are now fully backing PFI-style models – the Welsh adaptation, the mutual investment model (MIM) is mentioned in the strategy – and it is a case of political caution and civil service inertia that means the strategy is not bolder than it is. The important point, they say, is that a significant taboo around PFI-style models has been broken with this document.

No pushback

The caution in the document could be interpreted as a deliberate strategy to take the temperature of the political and public reaction to new PFI-style projects, at the same time as retaining a plausible escape route. If this was the idea, then the strategy could not have landed better for private finance proponents.

There were no howls of outrage in the media write-ups. And, in the Commons debate launching the strategy, just two backbench MPs asked Jones questions about PFI in the Commons, while Richard Fuller, responding for the Conservatives, did not even mention it – suggesting the opposition is not intending to politicise the issue.

It is not clear whether or not last week’s strategy represents some kind of “soft launch” of a return to PFI, or is a genuine reflection of a government that is yet to fully decide. Either way, it seems reasonable to propose restarting this kind of model just in limited areas, to make sure the concept works, and rebuild market and public confidence in the idea that these projects are going to go ahead.

But will it really stay that way? Ultimately it seems unlikely that, if the chancellor Rachel Reeves does give the final green light for these new forms of social infrastructure financing in the autumn Budget, they will be forever restricted to just the two areas mentioned in the strategy.

Health secretary Wes Streeting, for example, is seen as very keen to expand private finance into other areas beyond the primary care buildings referenced here.

And, if other departments outside health see the opportunity for privately financing important capital projects that they otherwise would not have the money for, it seems likely they will also start making strong cases for similar such treatment.

Investors, also, are clear that the public sector will not really get the full benefits from private finance until there is a significant pipeline of such projects, ensuring the creation of market and decent levels of competition. A couple of one-off programmes or the Lower Thames Crossing mega-project on its own are not enough. So there will be pressure from that direction too.

Yes, this is a relatively small step. But, once the taboo over private finance has been broken, there is no telling where this shift in attitude could lead. Held up against unrealistic expectations, this strategy looks unlikely to do that much. But it has opened a door, and it is now in the government’s gift to lead the construction industry through it.