The PFI alternatives may be hard to swallow

The Treasury Select Committee’s report published on Friday, which is - to say the least - skeptical about the benefits of the UK Private Finance Initiative - may well be music to the Chancellor’s ears. Its recommendations - if implemented - may well sound the death knell of private finance as we have come to know it, which would be handy to a Chancellor trying to further tighten the purse strings on spending departments.

If projects are brought onto the Government’s balance sheet and recognized as fiscal liabilities as recommended by the Committee, many will ask why not borrow conventionally, at a lower cost of capital to the Government and the taxpayer?

And there’s the rub. Because the Government is trapped between a policy of being committed to increased infrastructure expenditure (think IUK plans for the next three or so years - quite rightly - running into many billions of pounds) and demonstrating fiscal constraint to the markets not least to keep the general cost of borrowing down.

If the future is not PFI as we know it then the question must be asked about whether there’s a third (or is that a fourth) way? While still regarded with suspicion by some, it is hard to see how privatisation could not help at least in part with meeting the long term investment needs of the economy. It is surely unimaginable to envisage that the needs of telecoms, gas, water and other utilities could have been met through either conventional public borrowing or, to be fair, PFI style arrangements.

There is a real risk that contractual changes will prove costly to the taxpayer if the Government decides to change its mind about what users need

Yet there appears to be not much enthusiasm on the part of government policy makers to extend the privatized regulated asset base (or RAB) approach to our road network (raising the political spectre of some sort of user charging - heaven forbid) or even London Underground (still suffering from the aftermath of the highly criticized mother of all PPPs.)

For other sectors such as health and education, it is more tricky for a privatized utility model to be adopted. And to be fair to the Committee, where it is difficult to define the future needs of users of a PFI or PPP funded service, there is a real risk that contractual changes will prove costly to the taxpayer if the Government decides to change its mind about what users need (or should receive).

Perhaps the most remarkable finding of the report - as reflected in the responses from the CBI and others - is the lack of consensus as to whether PFI “works”.

Given the huge analytical capability of various Government watchdogs (including the National Audit Office ) think tanks and private sector players, is it not just a bit surprising that unlike nationalization or flogging and hanging, the policy class can’t come to a conclusive view on the issue?

My guess is that PFI will survive in some form because it will suit even the Treasury to have this tool at its disposal. When a favoured project needs to be built (High Speed 2 maybe?) it might prove incredibly handy.

We should look forward to reading the next run of NAO and Select Committee reports critiquing Britain’s next round of grand projets. Fingers crossed they will come in on time and budget - however they are financed. We live in hope……

Alexander Jan is head of Arup’s Transport Transaction Advice team