Government infrastructure plan poses 'substantial' risks

The government’s drive to attract private investment into infrastructure projects through state guarantees risks “substantial losses” to the taxpayer, the public spending watchdog has warned.

In a report on the government’s national infrastructure plan, the National Audit Office said Treasury’s move to give key infrastructure projects, such as the Northern Line extension to Battersea Power Station, a state guarantee meant tax payers “may be exposed to substantial losses” if the risks on the project, such as cost overruns, materialize.

The NAO called for the Treasury to ensure that government guarantees to attract private finance give financiers “strong disincentives to call upon those guarantees”, with guarantees:

• based on realistic assessments of risk at the outset;
• structured to align investor and taxpayer interests as far as possible; and
• accompanied by effective monitoring of the underlying risks as the project progresses

The report said the government expects £310bn to be spent by 2015 and beyond on new infrastructure projects, with private companies to wholly own and finance around 64% per cent of that figure.

It said this meant the burden of funding would shift towards the public as consumers rather than taxpayers.

The NAO raised concerns that uncertainty over government policy could lead financiers to abandon projects, while uncertainty over future demand for infrastructure could see the wrong kind of projects built.

The NAO also said there was a risk that the cumulative impact on consumers of funding infrastructure projects, where the costs are recovered by charging users, could lead to financial hardship, or the need for unplanned taxpayer support.

The NAO said the government had not undertaken an assessment of the likely impact of user charges for infrastructure on taxpayers.

Amyas Morse, head of the National Audit Office, said: “Economic infrastructure keeps the country running. Demand for infrastructure is set to increase, fuelled by population growth, technological progress, climate change and congestion.

“But there is a lot at stake in taking forward the national infrastructure plan in an environment of straitened resources, with real risks to value for money and uncertainty about the sustainability of piling costs on to consumers.

The NAO called for the government to:

• develop its National Infrastructure Plan and its market support mechanisms to give greater certainty to investors over the long term
• subject demand forecasts underpinning infrastructure plans to rigorous testing
• work with departments and regulators to provide greater clarity for consumers of the financial impact of planned infrastructure investment.
• refine the prioritisation of infrastructure programmes and projects. Limits on affordability and availability of finance may mean the government must either act to address those constraints or target its efforts more narrowly on projects of the highest priority

In response to the report, Margaret Hodge, MP, chair of the Public Accounts Committee said: “A shift towards relying on private investment will inevitably see consumers picking up the tab through higher energy and water bills, internet charges and train fares.

“Consumers will be exasperated to hear that the government has not even made the effort to assess the future impact this will have on their already hard pressed household budgets.

“The government needs to provide certainty to encourage investors and clarity about the impact on consumers. The Treasury needs to focus much more on what could go wrong rather than simply hoping for the best.

“Demand forecasts must be rigorously tested to avoid taxpayer exposure to the costs of flawed projects. The Treasury’s proposal to issue guarantees to encourage new finance will need careful monitoring to ensure the taxpayer does not get hit with extra expense.”

Rhian Kelly, CBI director for business environment, said: “Investing in rail, roads, energy, waste and digital infrastructure is a no-brainer. It creates thousands of construction jobs in the short term and generates growth in the long-run.

“With government spending severely squeezed, the private sector must step up to fill the gap.

“The NAO is right to call for greater clarity to taxpayer and consumers but the CBI wants the government to do much more to give investors certainty and confidence - to attract finance and drive down project costs.

“Our creaking infrastructure still lags behind other countries and we cannot afford further delays in getting spades in the ground.”