Labour have put private finance back on the agenda. But it never really went away. Ever since the PFI heyday of the early 2000’s, critics have labelled it a waste of money while proponents have pointed to new assets like the M6 toll road that otherwise may not have been built.
They key question is whether private finance is better value than public borrowing. Not just now, but in the long term. On that, the jury is still out.
Despite this, there are signs that the Government still has a strong preference for private finance and wants to increase its use on roads and rail. The Institute for Government’s new report explains how the Government can choose the best value finance option every time.
Treasury culture keeps borrowing ‘off balance sheet’
We are told repeatedly by civil servants from across government that that ministers and the Treasury encourage them to push as much infrastructure – and other spending – off balance sheet as much as possible. Privately financed capital investment is not counted towards the headline public sector debt figures and this is driving decisions.
Designing and financing projects solely to keep spending ‘off the balance sheet’ is not justifiable. It’s not fooling the ratings agencies, who have cited off balance sheet private finance as a reason for downgrading the ratings of other countries. Most critically, as the private sector has higher borrowing costs than government, private finance risk increases the costs of infrastructure for taxpayers and consumers.
Limited evidence makes government biased
The UK has used private finance extensively but successive governments have failed to collect the data necessary to measure its performance.
A previous Treasury model for comparing public and private finance options didn’t account for the lower cost of public borrowing and was unreasonably optimistic about the ability of private finance to deliver on-time and on-budget. It was rightly withdrawn but nothing has replaced it.
In the absence of a solid evidence base, it’s all too easy for untested assumptions and personal biases to influence decision making.
Base decisions on value, not budgeting ease
The way the Treasury allocates money also gives departments reasons to prefer private finance.
Departments typically decide how to finance projects before the money for construction is required. They may not know what their capital budgets will be when shovels hit the ground. Private finance can look attractive insofar as it provides certainty that money will be available.
It’s also easier to sign-off private finance at any time rather than waiting until the next Spending Review – which may be several years away. But this shouldn’t justify private finance if it is not good value.
Private finance can play a useful role in UK infrastructure but it should only be used if better than the alternatives.
Our report sets out concrete steps the Government can take to ensure that departments are basing decisions on long-term value for money, rather than accounting, budgeting and appraisal foibles. All of these problems are surmountable. Next week’s Budget is the perfect opportunity for the Chancellor to start fixing them.
Nick Davies is Associate Director at the Institute for Government