Transport’s bare cupboard

Despite a lack of projects in the pipeline, transport PPPs could still play a role in delivering significant projects in the coming years, says Arup's Alexander Jan.

Barring a major coalition upset such as Scotland voting to exit the Union, Britain will shortly begin its twelve month countdown to the next general election. Perhaps now is not such a bad time to take stock on transport PPPs in the UK. 

While the merger and acquisition market has been reasonably buoyant, particularly in the airport sector, the PPP market has been much more subdued.

According to Partnerships Bulletin data, there were no PFI/PPP transport projects that reached financial close in the UK in 2013, with the exception of the belated Thameslink rolling stock deal.  In 2012 there were three highway local authority PFI projects that got away: Isle of Wight (£325m); Hounslow (£800m) and Sheffield (£1.2bn), plus of course, the first tranche of the Intercity Express Programme (£4.5bn). But these too were largely legacy projects from the previous government. 

With the notable exception of the £500m Mersey Gateway, which has just reached financial close, and Intercity Express Programme phase two, which also closed this year, the cupboard is looking rather bare. A cursory visit to the Treasury’s Infrastructure UK PFI/PF2 tracker site suggests that there is nothing much on the radar and certainly nothing to match the heady days of the £15bn London Underground PPP deal or the £13bn RAF air-tanker programme.

"This September, a knife-edge result in the Scotland vote for independence might prove to be just the catalyst to kick-start proper fiscal devolution for England’s city regions."

There are perhaps a number of reasons for this. Firstly there has been little enthusiasm for the use of the PPP model by the coalition government. Despite dozens of reviews and assessments there is still no consensus as to whether the private finance route offers value for money. This is a real challenge for our industry. However unfairly, headline-grabbing stories of the cost of changing a light bulb in PFI hospitals, windfall gains from refinancing or the high profile collapse of the Underground PPP, have clearly scared politicians away from using private finance mechanisms.

At the same time and in the wake of the financial crisis, there has been a shift towards greater use of other funding models incorporating the use of government guarantees (think the Northern Line extension to Battersea) or prudential borrowing (Crossrail rolling stock).

Finally, there has been the impact of government austerity. Despite the rhetoric, expenditure on infrastructure has declined since the last election. UK public investment fell in real terms from around £52bn in 2009/10 to around half that amount in 2012/13. It was clearly too politically risky for the government to choose capital expenditure over doctors, nurses or winter fuel allowances.

Does this mean the end of the line for transport PPPs and PFI schemes? Not necessarily. The success of Halton Borough Council in achieving financial close on Mersey Gateway – a road toll project with a scheme value of five times the council’s annual budget – shows what is achievable. All but 10% of the cost of the project will be funded by user charges. The project sees a significant transfer of delivery risk to the private sector with equity and debt both in the financing mix.   But it has taken as long as two decades to get this project to delivery phase. And it is not alone. Crossrail the east to west rail link under London was arguably first muted in the 1940s. 

"Despite the rhetoric, expenditure on infrastructure has declined since the last election. UK public investment fell in real terms from around £52bn in 2009/10 to around half that amount in 2012/13." 

With a growing population and an economy finally returning to growth, the UK will need to become more efficient and effective at delivering infrastructure – however it is paid for. A big part of the future bill for meeting London’s transport needs (where the population is growing by a million every decade)  may well need to come from private finance.

The lessons of the last few years from the UK and abroad suggest that this can be achieved most successfully when local government is empowered and incentivised to get behind projects. A clear, transparent framework for getting investment away is also needed. Smaller local authorities may also need to be able to draw on expert advice – as was the case with Mersey Gateway.

Whatever the political complexion of the next government, it is not unreasonable to expect at least a partial return to the use of private finance. The real question is perhaps whether a future regime will allow local government to take the lead in getting things done.  To do that, Whitehall will need to give it greater financial freedom. 

The UK still has one of the most centralised systems of public expenditure in the Western world. This stifles the ability of UK city leaders to command the resources needed to invest in their regions. Even with an elected Mayor and assembly, only a tiny proportion of the taxes raised in London (just 7%) is under genuine local control. New York’s corresponding figure is seven times greater. Canada’s ratio of local and regional spend to GDP is nine times higher than that for the UK. 

There are however grounds for optimism, even if they come from an unusual place. This September, a knife-edge result in the Scotland vote for independence might prove to be just the catalyst to kick-start proper fiscal devolution for England’s city regions.  That in turn could help set the stage for private finance to return to transport investment. The future of the London’s transport investment may well lie in the ballot boxes of the Scots.

Alexander Jan is director, transaction advice at Arup