The Financial Inclusion and Markets Centre (FIMC) submitted evidence to The Committee of Public Accounts – often referred to as the Public Accounts Committee (PAC) – Inquiry into the Government’s use of private finance for infrastructure.
The PAC has now published its report Government’s use of private finance for infrastructure
In our submission, we focused on the potential risks and harms for consumers and citizens of using various forms of private finance to fund core physical, green, and social infrastructure. Given our remit, we also focused on the funding of core infrastructure, not the delivery or building of infrastructure. The FIMC submission can be found here: FIMC submission to Public Accounts Committee Inquiry Private Finance Infrastructure final 0425
The growth in private finance
Private finance is being deployed towards a range of public policy goals including: greening the economy; transforming the energy sector; building public infrastructure and services; building affordable housing; tackling homelessness; providing social care; levelling up and regeneration; and tackling poverty, financial and social exclusion. The state (central and local) is limiting its role in funding affordable housing, health, social care, specialist education, and other public services. Private finance seeks to fill that gap.
The trend for using private finance is driven by the: i. ‘received wisdom’ that the state cannot afford to spend more on infrastructure and there is no option but to turn to private finance to meet infrastructure funding needs; and ii. very effective private finance lobbying that misleadingly portrays private finance as ‘productive finance’ which keeps funding costs off the state ‘balance sheet’ thereby saving society money.
We do not yet know how much private finance in total will be deployed towards funding core physical, green, and social infrastructure. But, it is likely to be substantial. In opposition, the Government’s green investment plan committed £28 billion a year in public investment over the term of this Parliament. This has been scaled back to £4.7 billion a year.[1] In other words, rather than £140 billion over the lifetime of a five year Parliament, this will be reduced to just under £24 billion.
Government will instead rely even more on private finance to fund the green transition. GB Energy will not compete with the privatised utilities to provide electricity directly to consumers. It is a state owned investment vehicle intended to be capitalised with £8 billion of investment over the lifetime of this Parliament[2] to help finance and build renewable energy infrastructure. We have yet to see any real detail on how this would work with the private sector. From what we can see, it looks like its main role will be to de-risk projects for private finance.
The National Wealth Fund is being capitalised with £7.3 billion over the course of this Parliament. The remit is to support the Government’s growth and clean energy missions, and make ‘transformative’ investments across every part of the country. The NWF would set out to attract £3 of private finance for every £1 of public investment. We have yet to see the detail on how the NWF would attract that private finance. But, reading the initial report on the NWF, again the basic approach seems to be that public funds will be used to de-risk investments to ‘crowd in’ private finance sector.
Government is also trying to harness pension schemes, insurance companies, and asset managers/private equity to fund core physical, green, and social infrastructure. A whole new category of monetizable social sector assets has emerged because of the growing interest in ESG related concepts, and the financialisation of the economy and society. Concepts such as ‘catalytic finance’, and ‘impact finance’ have become popular allowing private finance to generate market returns from social assets, having those returns ‘de-risked’, all the while obtaining a reputational boost for doing so – what we term ‘impact washing’.[3]
Concerns about the use of private finance
To be clear, we do not say the state should fund all critical infrastructure or that private finance should not have a role. However, we have concerns about the:
- high cost of private finance which is ultimately borne by consumers and citizens (we call this the private finance penalty) and how the consequences of using private finance are not being explained to the public;
- how using private finance creates the illusion of keeping public borrowing costs low by transferring costs from the state ‘balance sheet’ (we call this a financial conjuring trick);
- the absence of robust framework to ensure that risk and reward is shared fairly between the state and private finance to avoid socialising the risks and privatising the rewards;
- the financial deregulation deployed to encourage private finance;
- the lack of meaningful transparency, governance, and accountability mechanisms to ensure consumers and citizens get a fair deal in commercial arrangements;
- the risks of ceding control over the funding of core infrastructure to largely unaccountable, powerful financial institutions;
- the wider financialisation of the economy and society and, more generally, the apparent absence of a strategic framework for determining how, where, and when to deploy state funding and private finance. We are at risk of repeating the mistakes of previous versions of PFI.
Key PAC findings
Although the PAC Inquiry was limited in the number of issues it covered – for example, it did not cover the impact of using private finance for infrastructure on consumers and citizens – it was good it recognised this form of finance can be more costly than state funding and can create the illusion of lower public borrowing and risk transfer.
The PAC also highlighted that there is no comprehensive framework for considering risk allocation between the public and private sector when working in partnership.
The PAC raised concerns that HM Treasury is yet to set out the principles and approach for aligning private financing models to the appropriate infrastructure projects, and its poor evaluation record has meant that no comprehensive evaluation has been undertaken to determine the cost and benefits of these financing models. It recommended that, to maximise the chances of delivering value for money, HM Treasury should evaluate the costs and benefits of alternate financing models, including the different costs of borrowing in the public and private sectors, to identify a preferred model for different types of infrastructure.
This is an important report. We hope the Government takes on board the PAC’s recommendations. Decisions made now will affect generations to come. We must avoid the mistakes of the previous PFI regime. The UK economy, public sector, and citizens are still paying the price for that.
[1] Keir Starmer slashes £28bn green spending pledge to £4.7bn in major U-turn