Feature Story

Secure, sustain, and strengthen

Seldom has there been so much intrigue in the PPP/PFI sector as there is now given the global credit crunch, an imminent general election and the intense scrutiny foisted upon the public finances in the years ahead. The PPP Journal took the opportunity, therefore, to ask the three major parties about their specific policies on the sector – here Economic Secretary to the Treasury, Ian Pearson discusses the Labour Party's polices on the sector.

Securing economic recovery and delivering sustainable growth going forward is the government's most important priority. Key to success is maintaining support into next year while the private sector recovers, investing now in the industries of the future, and once the recovery is secured, taking the action necessary to ensure the public finances remain on a sustainable footing.

We have set out a clear plan to halve government borrowing over four years. To do that we need to secure the return to growth, continue with the tough but fair decisions we have made on tax, and reduce the growth in public spending.

That's why at the Pre-Budget Report last year, we announced that government would save £12bn from greater efficiencies, £5bn from scaling back or cutting lower priorities, and £4.5bn from reducing the cost of public sector pay and pensions. And while we have not set out departmental budgets beyond 2010-11, the direction of change is very clear over the next few years.
This means a leaner central government is inevitable and desirable. So we will merge back office functions, relocate staff and reduce civil service overhead costs, and sell off assets that the government does not need to own.

But for growth we also need to invest in those foundations – jobs, skills and infrastructure – that are vital to balance our economy in the future. The development of modern, resilient infrastructure is a crucial component of the UK's economic growth and competitiveness. Infrastructure development attracts inward investment, creates jobs and is critical to the UK's move to a low carbon future.

Over the last decade we have made a generation's worth of investments in the UK's social and economic infrastructure, tackling longstanding issues in our health, education, housing, and transport sectors. Record levels of investment have delivered new hospitals and schools and improved transport links that benefit huge numbers of our citizens.

In addition, over the last 10 years, the government has promoted and strengthened a stable utility regulatory framework, which has facilitated investment of over £100bn in private sector infrastructure.

But looking to the decades ahead, the challenge to modernise and adapt the UK's infrastructure will intensify, particularly as we move to a low carbon economy. Up to £200bn of further infrastructure investment is already planned and while the majority of funding will come from the private sector, there is an important role for government to facilitate this investment and ensure that infrastructure networks are integrated and made resilient to change.

That is why the Chancellor announced the establishment of Infrastructure UK (IUK) at the last Pre-Budget Report to provide a new strategic focus on the needs of the country across infrastructure sectors and raise the bar on how we plan, prioritise, finance and deliver this investment.

I am working closely with Mervyn Davies on this agenda and IUK will develop and publish a strategy for the UK's infrastructure by Budget 2010. The strategy will examine issues affecting the UK's infrastructure and investment plans in key business enabling sectors (energy, transport, water, waste and communications). It will set out principles to guide future investment decisions, identify major challenges the UK faces in developing infrastructure and make recommendations for actions or further work to meet these challenges.

This will focus on unlocking new sources of private capital and developing new funding models and it will explore, amongst other options, the case for a low-carbon investment institution.
In establishing IUK, the capability of the Treasury's existing PPP policy team has been strengthened through the expertise of Partnerships UK, which has so effectively supported major government infrastructure projects. By doing this, we can provide expert and dedicated support to some of our most crucial long-term infrastructure projects, such as our commitment to ensure near-universal broadband by 2012 and to achieve private sector roll-out of next generation broadband to 90% of the population by 2017.

Similarly, IUK will assume the PFI lending responsibility previously carried out by the Treasury Infrastructure Finance Unit (TIFU), which has played a key role over the last year in tackling the impact of the credit crunch on PFI and PPP.

In a difficult year globally for major investments, the Treasury's prompt establishment of TIFU last year was a crucial measure in safeguarding the continued investment in key UK infrastructure. TIFU's place in the market has given funders confidence that PFI deals will reach financial close, and given sponsors and authorities a lever with which to secure greater funder engagement and on market terms. The result has been a clear and substantial improvement in the rate at which PFI projects are reaching financial close: 18 PFI projects, worth £1bn, were closed in 2008/09. Since the establishment of TIFU, 30 projects worth over £4.3bn have successfully reached financial close, including the key M25 widening project and 12 schools' projects.

PPPs such as these do not just benefit from private sector lending. By taking advantage of expertise and skills in the private sector, we have transformed the way in which government delivers services and infrastructure by allocating risks to those – public or private – who are best placed to manage them throughout the lifetime of the investment. This has cut out the waste previously inherent throughout government investment and which led to significant cost and delivery overruns on projects. As a result, PFI now has a recognised track record for delivering world-class services and infrastructure, providing schools, hospitals and roads on time, on budget and to a consistently high standard, and has helped improve commercial skills across government.

The UK is a world leader in the use of PFI and our knowledge and expertise in this area are widely sought after by countries across Europe and the rest of the world. Government through UK Trade and Investment and companies like Partnerships UK have shared this knowledge, helping other nations deliver their own programmes of PPPs and further consolidating the UK's strong reputation around the globe.

However, it is important to realise that PFI/PPP, whilst significant, is only a part of overall government investment in infrastructure. It is used to deliver some of the UK's most complex infrastructure projects but still only represents just over 10% of our overall investment. This government has ensured that PFI delivers real value for money to the taxpayer. We have improved transparency around PFI investment to a point where the information available on the cost and effectiveness of PFI projects is often far better than for conventionally procured projects. I believe that in a tough fiscal climate there will be strong opportunities for PFI projects in the future.

The challenges ahead – major infrastructure such as power stations, high-speed rail links, low carbon, digital infrastructure – will require a range of financing options and IUK is already working to increase private sector investment in these and other sectors. Along with PFI and other procurement routes, we will also explore other market and regulatory solutions to delivering the economic infrastructure that provides the backbone of our country. It is these investments, so vital to the UK's economic future, that IUK has been established to support and will have our focus and attention into the future.


Ian Pearson MP
Economic Secretary for the Treasury
The Labour Party
www.labour.org