Infrastructure Project Financing

• The report addresses how infrastructure projects are financed regarding public and private sectors raising upfront costs. Funding terms are especially focused on creating a quality infrastructure, transferal of risks, as well as reduced costs. The report identifies three reasons for private financing bias and remedies.

Report Context

• An analysis of what is currently wrong with UK infrastructure decision making
• Cost benefit analysis improvement in major infrastructure project assessment

Future Reports

• Negotiation of effective private finance deals for new infrastructure if needed will be reviewed
• The reduction of national infrastructure policy instability will be reviewed.
• Better relationships between government levels and increased public engagement in infrastructure decision making will be explored

Arbitrary Accounting Rules

• The issue of government comparisons between public spending and private finance are biased in favor of the latter is examined.
• Private financing not recorded as public spending does not add to public-sector debt.
• The study identifies reasons supporting government biases toward private finance.
• It is recommended to avoid finance solely on classifications, and getting projects off balance sheet because it is unjustifiable

Treasury Guidance

• Assessments of comparisons between off-balance sheet private finance and other public and private ways of financing a project must be made public.
• The Treasury should make public assessments of private finance projects utilizing wider measures of public sector debt and liabilities.
• Implications of a project's private finance should be assessed for the budget flexibility of specific agencies.

Game Appraisal

• Objective and evidence-based merit assessments of different options is key
• Improved processes are recommended
• Departments involved with infrastructure should collect and collate cost and quality evidence on past private finance projects.
• Departments should plan how they will collect evidence and evaluate future projects delivered through both public spending and private finance upon approval.
• The public sector should write data disclosure clauses into contracts to ensure data required for evaluation, and held by the private sector, are available to use,
• The Treasury should issue updated quantitative guidance for assessing private finance as soon as possible, using public borrowing costs while recognizing that the cost of public borrowing can be spread over time.
• Finance option appraisal should be moved to a project incentivized body on how to finance.

Treasury and Capital Investment

• The way the Treasury allocates money can create reasons departments prefer private finance.
• Private financing can result in poor spending value, a faster private finance sign-off, short Spending Review periods, and capital/resource budget allocations
• The Treasury must plan capital budgets on a five-year cycle at Spending Reviews, assuming that government will spend 1-1.2% of GDP on infrastructure.
• A portion of the 1–1.2% of GDP committed to infrastructure shouldn't be committed to specific projects, to maintain fiscal headroom for projects emerging outside the Spending Review cycle.
• Operational departments should improve long-term planning.

Introduction

• The government plans to invest hundreds of billions of pounds in economic infrastructure.
• Wise option consideration and risk transfer are necessary to deliver high quality infrastructure and minimize costs
• Public spending, private finance, and privatization all have benefits and drawbacks.

Finance Shortfall

• The latest assessment shows the plan totals almost £440 billion in anticipated investments.
• Private investors are expected to raise more than 60% of that total.
• Public funding is uncertain for some projects, and private funding is unlikely for 52 projects considering mixed finance.
• Projects with uncertain private financed are collectively forecast to cost £112bn, including the Moorside and Wylfa B nuclear power plants and Silvertown Tunnel link roads.

Brexit Pressures

• UK relationship uncertainties with the European Investment Bank due to Brexit
• EIB is an important UK lender that lent over €77B to UK energy, waste, communications, transport and water infrastructure projects between 1974-2016.
• Losing access to the EIB means losing a source of cheap finance, which could have helped to meet the shortfall.

Government Financing Options

• A substantial challenge exists due to an upcoming shortfall and potential lender losses.
• There are 4 broad options for financing new infrastructure upfront costs, depending on debt ownership.
• Table 1 shows options for publicly & privately owned infrastructure.

Accounting Standards

• UK accounting and statistical standards allow most private finance projects not to appear on the public sector balance sheet and therefore do not add to public sector debt.
• Due to political public borrowing, ministers and the Treasury favor private finance to ensure government projects don't contribute to to public sector debt.
• If projects are financed solely with the intention of getting them off balance sheet, they are unlikely to be best value.
• This can mean infrastructure costs will be higher than they need to be, and there will be less money available for infrastructure.
• Private finance projects do not add to public sector debt if the Office for National Statistics agrees that the private sector bears most project risks and rewards.
• Specific risks and rewards considered by the Office include construction, availability, and demand.
• An estimated 90% of privately financed capital investment is not counted as public sector debt.

Appraisal

• Appraisal of different finance options is not as robust as it should be.
• Evidence is lacking of the benefits of different finance options, responsibilities of teams undertaking appraisals conflict, along with a lack of quantitative guidance
• Assessments can be gamed

Strengths of PFI over Public Spendings

• Some research suggests that private finance projects generally outperform publicly financed projects for delivery to time and budget once a contract has been signed.
• PFI's success suggests project management is streamlined in privately led project

Budgeting Effects

• Departmental budgets influence infrastructure planning, with both resource budgets and capital budgets,
• The Treasury's influence over capital spending impacts project investment decisions

Key Recommendations

• Focus on accounting rules and narrow fiscal targets provide incentive but may result in projects not at best value and government is unable to assess it.
• Need for public reports for assessment of government and private sector projects.
• Need for the Chancellor to expand fiscal remit to include all project financing.

Improved Appraisal

• Build an improved infrastructure assessment based on evidence by collating data and assessing past/present successes
• Provide Quantitative Appraisal Guidance by focusing on public borrowing costs and real value assessments.

Improve Objectivity in project delivery

• Separate public assessment for financial appraisal as project teams may have conflicting interests that taint their decisions with their involvement with the project.

Revise Budgeting Model

• Government can provide stability by offering a specific set of time for projects which would give the departments enough time to organize and assess if there are projects they want to invest in.

Strengthen Civil Service Commercial Expertise

• Government need guidance from civil servants with expertise who understand implications of finances