Feature Story

Is the government's growth strategy working?

Just over 12 months ago, the government changed gear in the drive towards economic recovery. The opening months of the Coalition were dedicated to addressing the deficit, but in November 2010 the Chancellor and the Business Secretary launched a growth review looking at the challenges faced by particular sectors, and what role each area of the government could have in contributing towards growth. A change in the rhetoric around PPP has been less forthcoming, but as the following contributors argue to varying degrees, partnerships with the private sector may have a crucial role in securing prosperity for the nation

Squaring the circle of cutting public spending and delivering the capital investment needed to support private growth was always going to be a daunting prospect, and since the launch of the growth review progress has been mixed. Reforms have become bogged down and darkening economic clouds across the eurozone are causing unease throughout the economic landscape. This increases the urgency for a realistic plan to finance investment and transform the way that we deliver public services.

Engagement with the private sector is essential both to support growth and to help deliver more effective and efficient public services, which should always be supplied by the most suitable provider. Whether this is a public, private or voluntary organisation, what matters are the outcomes, not who delivers the service. Commission­ing based on outcomes offers the potential to not only change how services are delivered, but also for a variety of new providers to emerge in service delivery, including new partner­ships and joint ventures. A partnership approach allows providers to apply their experience and creativity to the challenges faced by public services – harnessing the different strengths of the public, private and voluntary sectors. By focusing on outcomes not inputs and by ensuring the appropriate sharing of risk, good performance is incentivised.

Private finance has a part to play, and where it is implemented well the results have been impressive. Whilst, of course, private finance is not right for every project or service, we do need to inject a bit more realism into the debate about its role. Critics of private finance rarely suggest credible alternatives to bridge the gap between what we need and what we can afford, and often fail to acknowledge the way that private funding models have improved since their first use.

Proposals to increase government borrowing simply are not realistic in the current financial climate; however, the cost of not investing in our public services, transport and energy infra­structure is even greater. While we must learn the lessons of the past, private finance is still a crucial part of the solution to funding the investment that we urgently need. It is imperative that the government sets out a vision for the role it foresees for business in the provision of public services. Maximising the benefits of partnership working and private finance will be crucial in helping secure economic growth and improving our public services.

Susan Anderson
Director of Public Services and Skills
CBI

Many commentators have dismissed the govern­ment's plan for growth as a failure, and the argument is easily made. When judged against strong growth in the pre-recession years, that of the last 18 months has been tepid at best and, at the time of writing, over 2.5 million people are unemployed in the UK.

However, these are not ordinary times. The financial crisis led to one of the deepest recessions that we have seen, and in the context of this and the continual uncertainty from the eurozone (our largest trading partners), one could instead argue that the UK economy has done pretty well.

It is of credit to the government that, despite constant downplaying of the UK economy from the media and the opposition, it has not been pressured into kneejerk responses that would undermine long-term growth. Temporary tax cuts, surprise taxes on specific sectors and the abolition of the national minimum wage are all examples of potentially damaging policies.

Whether or not you agree with specific measures, rapid and seemingly arbitrary change damages business confidence and certainty. However, the government has also failed to articulate in sufficient detail how the private sector can take up some of the slack from public sector cuts, and also how long-term structural reforms could make the UK a better place to do business. However, in a context where the government has not set out a long-term plan and where doomsayers are charting the downfall of the UK economy, it is hardly surprising that business does not have the confidence to invest.

It is clear that we need more private investment, whether in public or private sector ventures, to put the UK back on the path to long-term growth. To give business the confidence to invest for the long term, the govern­ment must stick to its guns on the deficit.

However, it must also go further. Reform to the tax and regulatory systems needs to be built around a long-term strategy, the planning system needs reform and we need to recognise the strength of all of our sectors, including the financial services sector.

New models for joint ventures between the public and private sectors also need to be developed to ensure that private finance is leveraged into infrastructure and more general govern­ment programmes. These need to allow space for innovation on the ground, while providing value for money and decent return on investment.

There is no doubt that these are difficult times, but we need to look past quarterly GDP figures and pessimism from the media. The future for the UK economy can be strong; we just need to put in place the right long-term policies to get there.

Matthew Oakley
Head of Enterprise, Growth and Social Policy
Policy Exchange

To emerge from recession and avoid the shadow of a double dip, growth needs to play a central role in government strategy. The creation of the right conditions for growth are repeatedly emphasised by the government as being its top priority. In November 2010, in 'The path to strong, sustainable and balanced growth', Chancellor George Osborne and Business Secretary

Vince Cable announced a grassroots review with the objective of ensuring each government department is doing all it can to deliver growth. This is a rolling programme for the duration of this parliament. The first phase of the growth review was embodied in 'The Plan for Growth', a report published in March 2011 alongside the Budget. One of the four overarching ambitions in the report is the encouragement of investment, which was supported in the Budget by the announcement of a £3bn investment into the Green Investment Bank to help drive forward the green infrastructure programme. The bank intends to commence lending from April 2012. The second phase of the growth review, which began in June, has been engaging businesses on matters including investment in infrastructure.

In July, the Treasury published 'The Plan for Growth Implementation Update', which set out the growth review's progress to that point. Reference is made in the update to the autumn launch of both the National Infrastructure Plan 2011 and the rolling two year programme of infrastructure projects where public funding has been agreed. Also referenced is the publication of the 'Government Construction Strategy' in May 2011, which reported on the need to introduce new forms of procurement that offer better value for money and affordability. 12 months on from the start of the growth review, there has been little clear and demonstrable output. The National Infrastructure Plan 2010 set out the government's intention to unlock £200bn of public and private sector investment over five years. 70% of this is to be delivered through the private sector, requiring effective PPP delivery models. Whilst there has been the emergence of some new models of procurement (for example, local asset-based vehicles and tax incremental financing), progress has been slow, and we have not been presented with a centrally endorsed model. Whilst it is acknowledged there may not be one size that fits all, there is a critical need for there to be some indication of delivery model, as well as vision and continuity of deal flow.

Michael Mullarkey
Partner
Trowers & Hamlins LLP

The 2010 general election focused heavily on proposed public spending cuts, and the year that followed saw growth stall and the government respond with a new growth agenda. A year into this agenda, it is time to question how things are progressing. The obvious answer would be to say that with growth expectations falling, the agenda is not going well. However, it would be unfair to judge a growing political consensus before real results can be achieved.

It is pleasing that politicians of every political colour have recognised infrastructure as the primary driver for growth. All three party conferences emphasised this sentiment, and the government is responding by promoting investment and attempting to kick-start numerous projects.

This type of financial support can be seen in mechanisms such as the £1bn allocated to the regional growth fund. In this case, the government targeted regions with low private sector employment to part-finance private developments that would be unviable if left solely to the market. We have also seen the advancement of the £3bn Green Investment Bank. This extends the same principle to new technologies that will benefit the environment and sustainability. Of course, this raises questions of where the money will come from. Private Finance Initiative (PFI) is now out of vogue with the government because of concerns over its increased funding costs relative to efficiency savings. There are also tight financial controls on all areas of public spending, and banks are still reluctant to loosen their purse strings after the credit crunch.

The industry has been working with the government to find solutions, and some key areas of opportunity have emerged. There is also scope for encouraging investment from risk-averse institutions, such as large pension funds. While investing in a new bridge or railway line can carry a high degree of risk in the construction phase with limited returns, the balance shifts significantly further down the line as projects near completion, giving way to lower financing costs, and secure and steady regular returns. Investor involvement at this later stage can result in any leveraged funds from the public sector being returned to the public purse.

Industry must respond. An innovative approach, where a consortium of major supply chain groups leads the project development, could be a means of delivering future infrastructure needs. Of course, this would demand different ways of thinking about risk management across the project life cycle supported by a rapid planning process. 200 years ago it was commonplace for engineers to seek funding for a new railway or port.

While engineering companies are now unlikely to want ownership of large infrastructure, they are able to both reduce costs through good planning and help bring investors on board. So while the growth agenda within the government has picked up momentum in recent months, for it to truly succeed, industry will also need to pick up the growth agenda.

Nelson Ogunshakin
Chief Executive
Association for Consultancy and Engineering (ACE)

Growth is stalling in the UK and beyond, yet the government has repeatedly told us that there is not, and will not, be a 'Plan B'. Then the Autumn Statement came along. Investment in housing, high-speed internet and wireless technology, transport infrastructure, and sustainable sources of energy and energy conservation are desperately necessary for economic competitiveness and carbon targets, and to address social need. Such investment would stimulate the economy and increase employment, in turn bolstering consumer spending and tax revenues. However, in the Autumn Statement the Chancellor announced a modest yet deferred programme of capital investment.

The government still seems reluctant to accept that it should finance a major investment-led recharging of an otherwise moribund economy. Governments in competitor nations have recognised this, and the UK's delay could further undermine our competitive position. However, the government instead wants to rely primarily on pension funds and other private sources of capital, remaining less keen on public taxed funded investment.

The public sector can usually borrow more cheaply than the private sector, and may already have access to capital resources, as much of the public sector is asset rich and revenue poor.

Through effective asset management it is possible to free up some of the capital locked into underused or redundant properties to invest for the future. This may require some form of PPP. Therefore, public service partnerships and private finance, including pension funds, will have roles to play in an investment programme for growth and public services. Such partnerships must be based on a public service ethos, and be transparent and accountable. They must secure value for money over the lifetime of every project, responsive citizen-centric services and effective risk management.

The government came into office seemingly opposed to, or at very least highly critical of, the PFI. It has since embarked on a review and its radicalism is yet to be tested on this – it is highly likely that there will be some modest reforms and a rebranding of the scheme.

However, whatever it is called, what is needed is a public and private-led investment programme carefully targeted to drive economic growth and create a better country to live and work in.

John Tizard
Director
Centre for Public Service Partnerships

The PFI is dead. Long live PFI." This was my initial, somewhat cynical, reaction to the news that the Private Finance Initiative (PFI) was being scrapped, because immediately afterwards it was announced that the government would be looking to attract more private finance into infrastructure projects.

Then again, this government's approach to PPPs has been laced with paradox. At a time when constraints on public spending have never been tighter and the need for infrastructure investment to help kick-start growth in the economy has never been greater, the use of private finance to fund this investment would seem to provide an obvious way out. Yet the hostility to the PFI across the political spectrum meant that there was little alternative to announcing the death of PFI.

However, at the same time as hitting out at PFI contractors making 'supernormal' profits, the government has been actively encouraging the private sector to invest in Payment by Results (PbR) schemes. These are to deliver public services, such as getting the unemployed back to work or preventing people from reoffending. The government has said that it has no problem with contractors making private equity-style returns; what matters are results.

There is no doubt that infrastructure investment should have a significant role to play in the growth agenda, and that must involve private finance when public finance is tight. In the recent CentreForum paper 'Moving from the financial crisis to sustainable growth' Vince Cable argued for privately and co-financed infrastructure, such as toll roads and use of a regulated asset-based model for infrastructure finance. So, the door is open.

By contrast, there is a real danger that the government will let its enthusiasm for PbR and
private involvement in public service delivery blind it to value for money. As I argued in 'Your choice: how to get better public services', a more gradualist approach to the introduction of PbR, until better data and more experience of what works are generated, would avoid some of the bad experience of PFI. Lots of examples of contractors making off like bandits or failing will soon discredit what is fundamentally a good initiative. However, the PPP industry can sometimes be its own worst enemy. Far too often, it has been prepared to excuse aggressive tax avoidance measures and other bad practice. Whilst politicians should tone down their rhetoric, the PPP industry needs to make moves to rebuild trust. The UK economy needs PPPs to build infrastructure, boost economic growth and improve public services.

Chris Nicholson
Director
CentreForum

The UK economy grew by 0.5% in the third quarter of 2011. Despite this, as part of the Chancellor's Autumn Statement the Office for Budget Responsibility (OBR) made substantial cuts to its growth forecast for 2011 and beyond.

The Organisation for Economic Cooperation and Development (OECD) have even predicted that the UK will fall back into recession by the end of 2011. In simple terms then, the government's growth strategy is not working.

The ongoing eurozone crisis provides good cover for such disappointing statistics, but the truth is that the near stagnation of the economy in the UK began in the fourth quarter of 2010 – well before the eurozone crisis reached boiling point. The slowdown in the UK is the result of a mix of domestic factors, particularly the Chancellor's tough fiscal stance, and global factors, such as higher oil and food prices.

In such circumstances, one could say that Local Enterprise Zones (LEPs), the regional growth fund, enterprise zones and a 'one-in, one-out' policy on red tape were never going to pass muster. Such measures could not possibly mitigate the devastating axe to public sector jobs and its wider impact on the economy.

At the heart of the domestic challenge remains the over-centralisation of economic and public affairs. The 'rebalancing' rhetoric may have been applied to the need to stimulate exports or advanced manufacturing; but spatially blind investment decisions on transport, science and technology, and medical research, amongst others, continue to favour the South East.

This is despite the OECD showing that northern regions already contribute 14% more than the capital to net aggregate growth and – with targeted inter­ventions – could grow much faster than the congested South East. Instead, key functions have been effectively returned to London, tying the hands of LEPs from driving local growth, whilst letting London and Scotland steam ahead with their greater fiscal powers.

Much hope is placed in Minister for Decentralisation and Cities Greg Clark, as he may well hold the keys for real and lasting change. By granting new powers for cities to raise
municipal bonds for infrastructure projects, giving LEPs more say over local employment and skills policies, and unlocking the planning system, Clark can establish the conditions for a much stronger recovery in the regions.

Meanwhile, local initiative must take centre stage. Far from seeing our health and education sectors as symbols of 'dependency', public servants should mobilise these assets – in close cooperation with private sector partners – to drive growth potential through the value chains they support. Similarly, private investors need to take the initiative in collaborating with officials to create regional investment banks to stimulate local investment.

Ed Cox
Director
Institute for Public Policy Research North (IPPR North)