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IFG - Government biased against public borrowing to pay for infrastructure

The Government is using private sector money to keep infrastructure spending ‘off balance sheet’ – even where this appears to be poor value, argues a new report.

Published by the Institute for Government (IfG), Public versus private: how to pick the best infrastructure financing option says the way the Government assesses options and allocates money means it favours private finance to deliver infrastructure. While politically attractive in the short term, off balance sheet private sector money will not always deliver the best deal in the long run.

Private finance contracts have been delivered on time and budget, but private finance initiative (PFI) contracts for waste services and megaprojects such as Metronet show how badly financed infrastructure projects can deliver poor results. Successive governments have not fairly compared public and private borrowing and have failed to collect the evidence needed to make good decisions on whether to pursue public or private financing in the future.

Despite the lack of evidence on the effectiveness of private finance, the Government still expects private investors to raise over 60% of the finance for future projects.

The Government must change the way it accounts, appraises and budgets for infrastructure. The report specifically recommends that the Chancellor set a target of spending 1% of GDP annually on infrastructure in the Spending Review. He should also remove the arbitrary exclusion of private finance from the National Infrastructure Commission’s remit.

Nick Davies, Associate Director at the Institute for Government, said:

“Successive governments have had a clear bias for private finance when it comes to infrastructure. This is despite limited evidence for the benefits of private finance, with examples of the public sector buying out collapsing private finance contracts, such as those used to maintain and renew London Underground’s infrastructure. With private finance once again politically controversial, it’s crucial that the Government makes evidence based financing choices. Private finance should be used when it is better value, not solely when it is off balance sheet.”

This paper is the latest in a series on improving infrastructure decision making in the UK.

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