Private investment in infrastructure has been criticised – wrongly – in the past few years. The government supports it abroad but has refused to promote it at home
“Billions being wasted on wasteful legacy PFI contacts”, declared the front page headline of a newspaper I was reading a few weeks ago. I inwardly groaned and braced myself for what lay inside. Perhaps I would find a balanced analysis of the benefits and costs of private finance initiatives (PFI). Perhaps the article would explain the huge investment that had been made possible in the UK’s schools, hospitals and streetlights as a result of private finance and the positive effect on the education, health and safety of individuals as a result. But no – the story was a litany of alleged scandals.
The assault on private finance is a symptom of the fractures in our society, between young and old, cities and fringes, mobile and settled
Like so many articles it happily conflated, and blamed, the use of private finance for many things that might reasonably have been a consequence regardless of the funding used. It referred to a police force that was “trying to think up new uses for a mothballed custody suite”, as if the decision to invest in the custody suite, or mothball it, was anything other than a public-sector decision. Later, the article raged against Leeds city council for replacing the streetlights across the city with LED bulbs at a cost of £22m, as if a private contractor should bear the cost of that change in specification.
I could continue to try dispassionately to dissect this and the many other articles attacking PFI that have appeared in the past few years, acknowledging the flaws and failings of certain projects, but asking that they be put in perspective against everything positive, but you and I know I would be wasting my time.
The government has shied away from vocal endorsement of private finance, leaving regulators to quietly strike the balance between customer and investor interest
Public opinion is firmly of the view that PFI was a mistake. The government a year ago declared it was abolishing PFI contracts. But a bit like a surgeon operating too late, the disease of mistrust had already spread, to encompass much of the wider use of private finance in UK infrastructure. The Labour Party proceeded to declare that it would renationalise the energy and water utilities, railway operations and the Royal Mail. The CBI a few weeks ago said that would cost £196bn, but I doubt anyone who rails against private finance really cares. For some people ideology seems to matter more than facts, which if anything are disbelieved.
When I travel outside the UK, people I speak to in most countries find all of this baffling. And they are right to be confused because there is also an inconsistency in the UK government’s position. The government is a strong supporter of the use of private finance for the development of infrastructure outside the UK – and rightly so. The World Bank itself acknowledged that the UN Sustainable Development Goals, which aim by 2030 to eliminate poverty and hunger and ensure the sustainability of our planet’s resources, could not be achieved without significant use of private finance in support of public funding. The UK is leading the way in finding mechanisms to blend public and private funds, for example through its support for the Private Infrastructure Development Group, but within the UK itself the government has shied away from vocal endorsement of private finance, leaving regulators to quietly strike the balance between customer and investor interest, and consulting on what to do next through the Infrastructure Finance Review.
Restoring public confidence in PFI is going to require private businesses in infrastructure to acknowledge their ultimate goal is the delivery of public services. The declaration in August by the Business Roundtable, in the US, that henceforth shareholders were not the sole or even primary stakeholders of a business, shows that business generally is moving in the direction of realising its societal responsibilities.
Investors in infrastructure must fully embed environment, social and governance (ESG) criteria into their investment decisions, and ensure the businesses in which they invest meet those expectations. This shift is already under way, with a 76% increase in consideration of ESG in UK investment decisions, and a quadrupling in the estimated value of the impact investing sector – investments made with the intention to generate a measurable, beneficial social or environmental effect alongside a financial return – to $502bn (£387bn), both in the past year.
There must also be full transparency in the nature of the relationship between private businesses and the communities they serve, which would help encourage a more informed discussion of the nature of risks and responsibilities being carried by private organisations and the appropriate remuneration. Treating contracts as commercially confidential has done more harm than good.
We need a more honest and open debate in this country about what we want, what we can afford, and how we are prepared to buy it. The assault on private finance is a symptom of the fractures in our society, between young and old, cities and fringes, mobile and settled. For government, businesses, media and each of us as individuals – we need to listen and compromise more, and defend and attack less.
Richard Threlfall is partner and global head of infrastructure at KPMG International