How will the UK government pay for much-needed infrastructure upgrades?

British Prime Minister Rachel Reeves is hoping to attract billions of pounds of private finance to upgrade the country's creaking infrastructure and will woo potential investors at a government investment summit on Monday.

Private finance schemes are already used more widely in the UK than anywhere else in the world, and this includes the energy, water and communications sectors, as well as some ports and roads. Companies and investment funds often provide upfront cash to projects in the form of partial equity loans. They recoup and earn a return on their initial investment through customer bills or taxpayer costs, sometimes over several years.

But the poor record of private finance over the past few decades has sparked debate about what is the best model to attract investors while still providing a good deal for taxpayers.

Will regulatory asset-based models still dominate?

The most widely used method of securing private financing for infrastructure projects is the regulated asset-based model.

The RAB model assigns value to a collection of physical assets, such as pipes and pumping stations, that can be borrowed like a mortgage. Because they are used by natural monopolies, regulators set the rates to customers. This provides a guaranteed revenue stream that can repay investors.

The money is currently being used to finance new projects such as the Thames Tideway, a £4.5 billion sewage tunnel under construction beneath London.

This model allows investors to bill customers while the asset is under construction, ensuring customers receive revenue from day one. For example, Thames Waters customers already pay for Tideway by adding an extra charge of $28 per household per year to their water bills.

The late infrastructure expert Martin Blaiklock likened it to a restaurant where people have to pay for their meals before they are even built, let alone served.

Governments often take on a protective role, having to commit equity or take over project management if significant cost overruns occur.

Differential Model Contracting: What is the best option for low-carbon energy?

Contract for difference is the government's main mechanism for supporting large-scale, low-carbon power infrastructure, providing investors with certainty about the price they will receive for the energy produced. This model has been used to support renewable energy across the UK, including one of the largest solar and battery farms in Kent. The farm should provide enough renewable electricity for 10,000 homes.

CFDs guarantee a fixed price for electricity, known as the strike price, that the generator receives per unit of output. As wholesale market prices fluctuate, generators either receive a subsidy up to a set price or receive a refund of any surplus above the set price.

Similar models include cap regimes that set minimum and maximum revenue levels for energy storage and interconnection with neighboring countries.

The government is also establishing a government-backed Great British Energy, which it says will attract private investment in the UK's clean, home-generated electricity.

Will PFI be revived?

The private finance scheme was suspended for central government projects in 2018 after it was deemed of low value to taxpayers. Special purpose vehicles are set up by investors who hire contractors to build and maintain infrastructure such as schools, hospitals, homes or roads.

The Labor government is being urged by investors to launch a new version of PFI after backing the model following a review by former Siemens chief executive Jurgen Maier.

The relaunch will come at a difficult time, as legal battles between investors and public authorities grow over the contractual terms of previous PFI projects. Many local authorities and NHS trusts are also struggling with huge debt repayments.

Former Labor Secretary Lord Hutton believes a revised version of the PFI could be effective for future projects. This could include a Welsh model where the government or local authorities would hold shares and investor returns would be limited.

Water regulator Ofwat is also encouraging utilities to use a similar model of direct procurement for customers for 14 billion units of new infrastructure.

Government Guarantees: Is there too much risk in the public sector?

The government-guaranteed scheme is run by the UK Infrastructure Bank and provides lenders with an unconditional guarantee that they will be repaid in full in return for a fixed fee.

It has most recently been used to support broadband company Gigaclear, but UKIB says there is more in the pipeline.

A 2016 National Audit Office report criticized plans to shift risk to the public sector.

UKIB invests in infrastructure projects with private investors and was recently tasked with managing a new $7 billion National Wealth Fund.

What will the government do?

The government is expected to stick to most of these existing plans as it seeks to limit public borrowing.

Richard Threlfall, global head of infrastructure at KPMG and advisor to several privately financed projects, said: All infrastructure costs are ultimately paid by us, the citizens and consumers, but the assets are delivered and maintained even though private capital is more expensive than government borrowing. , public spending constraints do not make them less of a priority.

But Stephen Glaister, an infrastructure expert at Imperial College London, said governments should avoid signing overly long and unmanageable contracts to disguise the total amount they are actually borrowing.

suggestion

Infrastructure experts argue that where private finance is used, it should be more strictly regulated. In particular, Alex Jan, a former economics director at Arup who advised on several PPP schemes, said the schemes needed to be more transparent.

He said it would be easy for the government to insist on full disclosure of its revenues in return for public subsidies.

But Dieter Helm, a utilities expert at the University of Oxford, warned that Labor's pursuit of private finance meant it risked leaving a legacy of massive new debt burdens that, like earlier PFI schemes and the large-scale financialization of utilities, would leave a long-lasting aftertaste. As witnessed in the Thames disaster.

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