UK: THE ROAD BLOCK THAT LEADS BACK TO THE TREASURY. - Would-be financiers of public sector projects have many hurdles to jump.

by Roger Eglin.
Last Updated: 31 Aug 2010

Would-be financiers of public sector projects have many hurdles to jump.

In the early 1980s the Chartered Institute of Transport staged a day-long seminar on the role private capital could play in financing infrastructure development. One of the early speakers, a transport minister, painted an encouraging picture. The Government wanted to involve the private sector and this was to be the way ahead. The audience, many of them from the construction industry as well as transport, was enthused. This was the message they wanted to hear.

The optimism failed to last longer than the early afternoon. Speaking later in the morning, the transport department's permanent secretary poured cold water over his own minister's enthusiasm. The division within the transport department was easily explained. The permanent secretary had just moved from the Treasury and shared all that department's reluctance about private funding. The rules covering the financing of further projects were set in stone and they were going to stay that way.

Nearly a decade later we must ask whether anything has changed. While countless ministers have pledged their support for a greater role for the private sector, little seems to have happened in practical terms. Would-be financiers, builders and suppliers of equipment are becoming increasingly disenchanted and sceptical. Why spend what can be millions of pounds working up financing proposals and projects if nothing is going to result? 'There is a danger that the whole government private finance initiative will be discredited unless real holes can be dug in the ground pretty soon,' Howard Davies, director-general of the Confederation of British Industry, told a CBI conference on the subject.

Given the level of political support, there ought to be no real obstacle to getting an initiative off the ground. It was John Major himself who told the conference that the involvement of private capital in public sector projects could harness government and business together to build a new prosperity across Britain.

Capturing the mood, The Times reported that 'pioneering new schemes aimed at attracting private finance for big public sector infrastructure projects are being drawn up in Whitehall in response to the prime minister's search for bold measures to end the recession'. Ministers, the paper's political correspondent went on to add, were urgently examining options that would boost growth, jobs and the recovery by using public sector grants to pump prime projects such as the building of new roads and bridges, and the purchase of new railway rolling stock. 'Downing Street sources said that John Major's emphasis on the importance of protecting capital projects during the toughest spending round for a decade had "energised" government departments in their search for novel ways of keeping afloat programmes.'

Though this story appeared just over a year ago, the energisation of Whitehall has so far produced no discernible progress.

Yet ministerial support is said to be still as keen as ever. Norman Lamont's departure from the Treasury took one enthusiastic player out of the game but Kenneth Clarke, his successor, is believed to share similar views.

In the face of such political enthusiasm, the disenchantment of the business community is understandable. If an enthusiastic prime minister cannot get things moving, businessmen can be forgiven for asking, what can?

It was embarrassing enough when President Mitterrand made his disparaging remarks about how dramatically the quality of the London-Paris rail journey deteriorates once across the Channel into Kent. Few doubt that the case for investing in this country's infrastructure is overwhelming. Inadequate roads, poor commuter services and a worn-out railway system are all signs of under-investment. Davies told the CBI conference that Britain was spending consistently less than its industrial rivals. 'In 1988 (the latest year for which comparable figures are available) UK investment in the road and rail infrastructure was just 0.5% of GDP. This compared with 1% in France and Germany and 1.4% in Italy.' He went on to add that although public spending had increased by a fifth over the past decade, there had been no growth in public sector capital spending.

The level of UK spending has improved, Davies pointed out. But the case for more is a powerful one. Apart from the basic need to provide the country with efficient communications, more spending would bring a big economic fillip. The recession in the construction industry is set to continue with more jobs to go and no sustained recovery expected until 1995. New equipment orders would help industry, particularly in those areas hit by the rundown in defence spending.

Some of the frustration stems from the fact that a small number of projects have gone ahead with private sector finance. The Dartford bridge has been a noteworthy success, bringing relief to countless motorists. The second Severn bridge is a similar venture. The Birmingham northern relief road is under construction and the Paddington-Heathrow rail link is the latest project to go ahead - although it has taken five years so far and the money may well come from Japan. There are other projects under discussion. The Government wants the private sector to contribute 30% of the £2 billion London CrossRail scheme. The Jubilee line into Docklands is another possible candidate and some City bankers are looking at others. The Government has asked Hambros, the merchant bank, to produce a plan involving the private sector in the £300 million resignalling project for the West coast main line. This same bank is looking at possible schemes for London Transport. Even the Treasury has a task force studying the private finance initiative.

Yet the barriers to progress are immense. The original problem was the Treasury's insistence that such projects could generally be financed more cheaply with public sector funds. These rules have been modified. Any project can go ahead, provided government spending on it represents value for money for the taxpayer; private participation is usually decided on the basis of competitive bidding, and the private sector assumes substantial risk.

Yet this 'liberalisation' is still a substantial deterrent. The cost of developing a competitive bid can be prohibitive but the real hurdle is the risk factor. In virtually all the projects that have gone ahead, the risk is minimised by the stream of income from the toll or fare revenues. Where this definable source of income does not exist, with CrossRail, for example, it becomes more difficult to justify the project. And the Channel Tunnel is a warning of the great risks of major construction projects. Any private company will hesitate to involve itself in such a venture.

Yet other countries - France and Italy - show how it can be done. It could be done here and if the Treasury wants to see public infrastructure spending cut, it is even more urgent that progress is made. But it depends on the will to turn political rhetoric into real action - and this depends on the Treasury's willingness to change its spots.

Roger Eglin is associate business editor of the Sunday Times.

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