Tuesday29 July 2014

Should the government fund public projects?

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Yes, says Lewis Goodall, private finance alone is not enough; but Steve McGuckin feels it is time to explore alternatives models of funding


Lewis Goodall
Researcher at IPPR North

Over the last 30 years, both Labour and Conservative governments have allowed British investment levels in infrastructure to fall to the lowest in the G7. The UK has the unhappy distinction of being ranked 33rd out of 39 countries for overall infrastructure quality. This is a chronic weakness
that damages our economic potential, especially in our regions, which are ill served by government and private sector investment patterns but boast some of the strongest potential to grow.

Investment through private wealth is welcome, but won’t do the job on its own. Even in the good times, many businesses and innovators in the north of England struggled to access the finance they needed: 70% of venture capital firms, for example, are located in London.

To recover from the recession, we must rekindle the radicalism of the first industrial revolution. A regional investment bank would help to fill the investment vacuum and unlock significant economic potential, providing capital investment and match funding in projects that could transform economic prospects.

The German Landesbanken, operating with a similar remit, have been an important part of Germany’s continued industrial and economic vitality.
Such a bank could draw on local authority pension funds, sovereign wealth funds and a myriad other sources of finance. Crucially it would empower authorities to help reverse our poor history of regional investment and help get the country firing on all cylinders, creating the growth that is proving so elusive.


Steve McGuckin
UK managing director at Turner & Townsend

If ever there was a time to explore alternatives to conventional government funding for projects, this is it. The coalition government was elected with a mandate to tackle the deficit, and this week the prime minister reaffirmed his commit-ment to reduce public debt. George Osborne is clearly reluctant to start writing big cheques, but expensive public projects, whether in infrastructure or social infrastructure, can be paid for in a variety of ways.

The levers available to government are interdependent and complex. The most obvious way to fund big projects is to borrow the money needed to build them.
But in investment terms, project finance is inherently risky as it involves tying up cash for a long period, with an outcome that is not secure.

In many cases, the banks are unwilling, or unable, to lend the vast sums needed.

However the long timescales involved do suit pension funds. Their source of capital is different, but their aim is similar to that of the banks — a steady return on their investment over time.

Alternatively the government could use bond finance - that is, a pledge to pay a fixed amount of money to investors over time.

The problem is that the bond’s value is fixed before construction starts — and could leave the government with an expensive shortfall if the project goes over budget.

I suggest the government uses its leverage on RBS and Lloyds, the two banks in which it is a major shareholder, to lend. Handled right, this could deliver a “mixed economy” of public and private sector lending.

PFI, the funding model darling of the 1990s, is now tarnished in the eyes of the public, but will almost certainly be rehabilitated and rebranded. Its days are not over.



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