Replacing crumbling infrastructure: Business Month

For several years, the default position for major public infrastructure projects in the UK has been the Private Finance Initiative. But the situation has abruptly changed in recent months, with the coalition government taking action on the public spending deficit and so reducing the build-up of future liabilities. Concerns about PFI have been added to by the increased cost of finance during the recession.

Anxieties have been backed by extremely critical reports from the two most powerful House of Commons select committees, which have both just examined the impact of PFI. The chair of the Public Accounts Committee, former Labour minister Margaret Hodge, described PFI as “a better deal for the private sector than for the taxpayer.”

Meanwhile, senior Conservative MP, Andrew Tyrie, speaking as chair of the Treasury Select Committee, said: “We can’t carry on as we are, expecting the next generation of taxpayers to pick up the tab. PFI should only be used where we can show clear benefits for the taxpayer.”

The tide, it seems, has turned for PFI. Yet the need for public infrastructure improvement remains urgent – especially in Northern Ireland. We need major road schemes, renovation of our water supply and sewage systems, new schools, more social housing, hospital improvements and the regeneration of much of our urban environment. Without this investment, our public services will deteriorate and our economy will be held back. But how can we pay for infrastructure improvement?

The key agency for delivering improved public infrastructure in Northern Ireland is the Strategic Investment Board. Although its profile is not as high as it was a few years ago, the Board emphasises that it is very busy doing the practical things needed to bring down the costs of government procurement, with more of its advisors situated within departments. It is also engaged in several major schemes – in particular, the Cookstown police training college and the redevelopment of the Maze, including overseeing the creation of a development corporation for the site and the recruitment of a board for this.

Another key SIB project is the new hospital at Enniskillen, which is progressing well, says the SIB. Unlike other major projects in Northern Ireland, the Enniskillen hospital was financed through the PFI – though the credit crunch and Irish banking crisis caused severe difficulties in signing-off the project.

But in general terms, Northern Ireland has been less dependent on the PFI than has been the case in England. Despite this, ministers and officials here have to look at new ways of financing public infrastructure. The signs of this were clear at a recent private event, when an Executive minister raised the question of using tolls to pay for new roads. Much of the focus, in fact, is now likely to be on similarly generating and using future revenues to pay for new infrastructure.

This approach is gaining much greater attention from the UK Government, where Treasury minister Danny Alexander has given his support to the use of ‘Tax Incremental Financing’. English local authorities are being allocated more powers to borrow to pay for major infrastructure projects, with the repayment costs met from higher levels of future income.

While this approach is unlikely to work for projects such as schools that do not normally generate revenue, it is widely used in the United States for transport projects. In fact, this use of TIF is nearer to the original intention behind the PFI when introduced by the John Major government for selected transport projects, such as the Heathrow Express rail link and the Docklands Light Railway.

A recent example of the use of TIF in the UK has been the decision to help pay for London’s Crossrail through an uplift in the business rate. This is justified by the improvement in the quality of infrastructure for London’s businesses and also the assumed increase in property values. The same principle underpins the likely use of TIF by English local authorities.

But it is to Scotland that the Northern Ireland Executive may be tempted to look most closely for inspiration. Scottish Nationalists have long been sceptical about PFI and were unhappy at what they saw as excessive profits taken by PFI contractors. As a result, they set-up the Scottish Futures Trust, whose alternative to PFI has been described as being ‘not-for-profit’.

This description is slightly misleading, as private sector contractors still generate a profitable return on their work. But the system does prevent special purpose vehicles being created in order for contractors to pool together to bid for contracts and then generate ‘super profits’ through high returns on equity investments. Instead, SFT ensures substantial public sector client engagement in project management; no profit-distributing equity; and a cap on the return any private sector partner can obtain.

But alongside this non-profit distributing model for public infrastructure, SFT has also been experimenting – so far successfully – with TIF. SFT sees this as a potentially very important device for allowing major new infrastructure schemes to go ahead.

Two major projects using TIF have been given approval to assist with the Edinburgh Waterfront regeneration and the building of a 3,500 homes new town on the old Ravenscraig steel works. A business case for a third major scheme – the extension of Glasgow’s Buchanan Galleries shopping complex – is currently being finalised. Those first three projects should supply about £250m of public funding to unlock over £1.5bn from private sector financing. Three other major schemes are also being worked up by Scottish councils.

SFT argues that its approach is clearly working, demonstrating clear value across all its programmes. “We have already delivered over £129m of benefits and savings to the taxpayers of Scotland and that has been verified by the LSE [London School of Economics] and Grant Thornton,” says Neil Rutherford, associate director of SFT. “Cumulatively, we have brought in something like a quarter of a billion pounds [of infrastructure spending].

“TIF as a model is about growing the tool box. It’s a different way of doing things and brings in an additional revenue stream when things are difficult. We are capturing future business rates from the development as it comes on stream. We are paying for growth by using the proceeds of growth. This is seen as a key tool in the current environment.”

It is a tool that is likely to be increasingly attractive to ministers here – not least as they consider the implications of the delay and possible collapse of the A5 Derry-Dublin road project. New funding models are now desperately needed.


How TIF works

Scotland’s government gave approval in March this year for the use of Tax Incremental Financing – TIF – to assist with the costs of the regeneration of the former Ravenscraig steel works. By using TIF, North Lanarkshire Council can use the assumed future business rates income generated by the scheme to pay-off the borrowing that will finance the initial elements of the scheme.

Projects to be financed through the £73m released via TIF are the upgrading of two key road links, land acquisition and site infrastructure works. All these activities must be carried out before the next stage of scheme development can proceed. It is predicted that the seed-corn public sector funds will release £425m of private investment.

The Ravenscraig area has several social and economic problems, compounded by the recession and the closure of the steel works in 1992. It is hoped that the project will lead to over 4,000 extra full time equivalent jobs, an additional 500 jobs during the construction phase and £112m of additional annual economic activity.

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