Solomon Nevins: What to make of Labour’s infrastructure financing plans

Shadow chancellor John McDonnell this week told his party’s annual conference that a future Labour government would bring Private Finance Initiative (PFI) contracts back in house. Speaking for the Shadow chancellor party sources later clarified this meant all PFI contracts would be reviewed and they would take back control of the contracts if necessary. 

PFI has been about the public and private sector partnering up to develop and run major infrastructure in the UK for the past 30 years. Under this arrangement the private sector fronts the initial capital to build a project and then has a concession agreement to operate the project. This is typically for a 25-year period during which the government agrees to make a series of payments on the basis that certain requirements are met. The model was initially developed as a way to reduce the burden on government to fund infrastructure projects and improve the delivery in terms of costs and timeliness, leveraging private sector expertise.

The sector has generated a poor reputation for being quite a costly way of funding projects, albeit where the costs are largely known up front. As a result the public sector has largely fallen out of love with the PFI model as evidenced by the reduced number of projects delivered in this way and the restructuring of the public private finance model in recent years. This has gone some way to deliver a more balanced distribution of profit between the public and private sector while maintaining the government’s commitment to private sector involvement in infrastructure and services

Despite this shift in recent years Labour’s announcement would be a significant change for the infrastructure sector. If its plan is to bring all PFI contracts back under the control of government it is going to be extremely difficult, and potentially very expensive. PFI deals are subject to legal contracts so simply bringing them in house would break the terms of the contract. It also assumes the UK government is no longer reliant on the private sector to invest or provide capital for new projects and assumes the public sector is better equipped to complete projects on time and on budget than the private sector.

Part of the appeal of PFI was you were paying for projects over long term. It’s going to be hard for government to ignore this option unless it finds itself suddenly flush with cash. Infrastructure investment has many real and tangible benefits for the economy, including jobs growth and improved productivity, so any reduction in long term spending is going to damage the medium and long term prospects for the UK economy.

Solomon Nevins is senior investment manager at Architas