Delivering infrastructure through a new public-private partnership

Author: Richard Carr, on the LGA website   |  

Since the trenchant conclusions of the August 2011 Treasury Select Committee on PFI, there has been widespread discussion about how local and national government can deliver the required levels of infrastructure in the immediate future (œ200bn by 2015) without locking itself into deals which burden the taxpayer for decades to come.

Controversial though it may be, according to recent assessments 118 hospitals would not have been built without PFI. Likewise, the Building Schools for the Future programme also provided a good example of how an intelligent use of PFI could deliver savings to the taxpayer. To Jesse Norman and others however, whilst PFI did indeed deliver improvements in limited areas, it could have been achieved with much lower levels of public debt being incurred. Local government, having received around œ6bn in PFI credits in the last two financial years, will need to get smarter ? in the tough financial years ahead the estimated value of PFI (œ1 worth of capital projects for over œ4 of public debt) is unlikely to cut the mustard. People, rightly, will expect value for money.

The question is how to access the positive side of PFI ? private sector expertise and capital ? whilst retaining a strong hand on the direction of a given project, and the ability to renegotiate the terms of agreement as and when required. Local Asset Backed Vehicles (LABVs), it seems, may form a key component of any post-PFI solution. With the local authority providing the land for a development, and the private sector (sometimes just a developer, though often backed by some form of institutional fund) offering the skill-sets to deliver a cost-effective project, LABVs see both public and private interests taking a stake (normally 50/50) in such an undertaking, and thereby sharing in any profits accrued.

The added bonus is that by helping to manage such vehicles the commercial expertise of local authorities will only increase, thereby arming them should they indeed wish to dip their toes in PFI – in whatever new form it takes. Early adopters of LABVs such as Tunbridge Wells offer much in the way of best practice.

Similarly, local authorities may take a double stake in such a venture through their pension funds. With public pension funds in Canada and Australian investing up to a tenth of their capital into infrastructure projects, there have been growing calls for English pension funds to do similar. Some are already taking a lead ? with Suffolk County Council seeking to invest five per cent of its investment allocation into infrastructure under the belief that such a move can provide inflation linked and stable returns over the long term.

Should this pattern be replicated nationally, it could produce around an extra œ7bn of direct investment and, importantly, help facilitate increased levels of private capital into infrastructure projects by potentially cushioning the risk through some form mezzanine debt arrangement. This needs careful management, but is worth exploring, as (after the announcements in the Autumn Statement) the government indeed appears to be doing over the coming months. We await the outcome of such discussions.

The key will be for local authorities to form a new, constructive relationship with the private sector. The new Local Enterprise Partnerships, together with astute use of the new œ500m Growing Places Fund, will certainly help. We at Localis are conducting research into all this for a report due to be published early next year ? the new landscape is still evolving but, by thinking creatively, local authorities can help deliver much needed growth in the short term whilst ensuring the nation does not fall behind over the long run.

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