How can we find the funding for infrastructure in 2012?
Author: Alex Thomson, Localis, in the Guardian Local Government Network - Jan 9, 2012
Funding public infrastructure is tricky; it's not sexy and no one will directly thank you for pouring billions of pounds into it, but residents and businesses expect it to be there. And there is a dawning realisation that a significant increase in infrastructure investment is needed to lay the foundations for future economic growth.
Beyond the political extremes, most would see some form of public-private sector partnership as constituting the best mechanism to deliver on such demand – the question is how to do it in a manner beneficial to all involved. Private finance initiatives (PFI) formed the solution for successive governments after the introduction of the scheme in 1992, until the credit crunch saw the Treasury having to almost entirely self-fund the mechanism from 2009 onwards.
During the Labour years, local authorities made use of more than £13bn in PFI credits, while more than £200bn worth of debt was racked up in total. Hospitals and schools were built but, as critics such as MP Jesse Norman noted, at an extortionate cost. Suffice to say, the Treasury Select Committee did not look so kindly on such undertakings in its damning verdicts last August.
With PFI no longer the darling of policy wonks, local capital budgets cut by more than half and the failure of affordable housing provision, authorities will need to get creative to fund future infrastructure. New (and returning) borrowing options – tax increment finance, the bond market, enterprise zones – offer some room for manoeuvre, but there are other less trumpeted measures also under consideration.
Two options were floated by the Treasury select committee in August 2011. The first was an extension of the regulatory asset base of industries. In plain English, this means allowing selected regulated monopolies to charge more to their consumers in the future, borrowing against this projected increase to fund infrastructure at present. Energy is one area where this approach will go ahead, but with a reduction in the planned rise of rail fares from 8% to 6% in the chancellor's autumn statement, this path an only be taken so far.
The other solution discussed was the use of Local Asset Backed Vehicles (LABVs). A number of authorities have used these in recent years, from Tunbridge Wells to Newcastle. In a LABV, a council offers up public land and a private firm the skill sets and finance to develop that asset – with both parties sharing in the benefits of development.
To date, LABVs have avoided the lengthy procurement process and upfront costs of PFI and strengthened local authorities' business know how. While maintaining a significant (normally 50%) risk within the local authority, they also have the potential to deliver both infrastructure, and a financial profit which the authority (unlike PFI) directly shares in.
LABVs will not be right for every council but, given the chancellor's recent announcement that the Treasury was in discussions with institutional funds to invest in infrastructure, they constitute a potential avenue to deliver development (and therefore new jobs) now, though retaining the potential to benefit for years to come. Through such a vehicle the family silver is on loan and still readily accessible, not sold off outright.
Through land auctions, the national planning policy framework and the aborted sale of forests, there has been much talk of how to access the value of public land in times of fiscal austerity. With the government's commitment to devolve financial autonomy to the lowest possible level, the promise of a £200bn investment in infrastructure by 2015 and, of course, the need to bring down the deficit as fast as possible, LABVs may prove a beneficial undertaking. Where there is demand and where they are appropriate, the Treasury and local authorities alike have much to gain.
Alex Thomson is chief executive of the thinktank Localis. Localis is soon to release a report on local asset backed vehicles, pension funds and the use of bonds to support public infrastructure
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