Turner & Townsend suggests smaller infrastructure projects still need the “tarnished” funding model

George Osborne’s Autumn statement has prompted speculation that government-backed projects will in future be funded by a “retooled version of PFI”.

The chancellor has declared his intention to use private pension funds as a long-term funding source for infrastructure projects, but commentators have suggested that smaller schemes will still require a variation on the PFI model.  

Murray Rowden, managing director of infrastructure at global programme management consultancy Turner & Townsend, said:

“Mr Osborne said he has accounted ‘pound for pound’ for all of the £5bn of public money due to be injected into infrastructure building over the next three years.

“But if the government is to find the extra funds needed to meet the vast capital cost involved, it will need to perform a twin feat – of both creativity and persuasion.

“PFI, once the darling of the Labour government, is now the funding model that dare not speak its name, so in its stead the government is proposing to use private pension funds as a source of long-term funding.

“It’s a logical and tested way of keeping much of the cost off the government’s balance sheet - and getting a significant chunk of the money up front. And it should be an easy sell too. From the pension funds’ perspective, the right projects can be very appealing - as they provide a long-term, steady income stream and low risk.

“But the smaller projects will provide a tougher challenge, as investors in these will often want to see quicker returns in return for higher risk.

“The most likely source of this sort of funding will be a retooled version of PFI.”

Rowden claimed the funding model could still have a positive role to play, saying: “Despite its tarnished image and reputation for hidden cost, the PFI model can be an effective one. Our experience shows that it’s still popular in several other countries - especially Canada.

“Successive UK governments have found its ability to allow investment without driving up public debt levels to be irresistible.

“It will be given a rework and a rebrand of course - perhaps along the lines of the ‘not for profit’ model being mooted by the Scottish government.

“But if the chancellor is to come close to delivering this ambitious list of infrastructure projects, he cannot count on the pension funds to provide all the investment needed. He will inevitably be seduced, like his predecessors, by the siren song of PFI.”