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By Nick Jones, Global Director of PwC’s Public Sector Research Centre
Last week the International Monetary Fund called upon the UK Government to do more to support private sector investment as part of its ‘balanced budget fiscal expansion’ remedy. At the same time, the Confederation of British Industry has criticised Government for lack of progress on infrastructure investment, despite Autumn Statement commitments.
Many policy makers and commentators agree that infrastructure investment in a recession is likely to be beneficial – see our previous blog. The question is how can the private sector be incentivised to help fund this? Increased borrowing may spook bond markets and ratings agencies, and private finance may be difficult to source.
Government guarantees ultimately leave the issuing administration on the hook should things go awry and so must be carefully structured. However, they may reduce the underlying costs of funding investments while not scoring against Public Sector Net Debt (‘PSND’) – the chief measure that the Office of National Statistics uses to monitor the UK Government’s borrowing.
This is because the method (known as ESA 95) used for this monitoring only records funds flows between entities and only when these flows happen. While borrowing is measured because money has changed hands, a guarantee may not be measured when agreed because money has not, and may never, change hands.
Examples of guarantees potentially excluded from PSND include a promise to meet cost overruns for a North Sea wind farm due to protracted bad weather, or a commitment to top up toll revenues for a bridge should demand fall below a certain level. However, some guarantees may be included in PSND, examples being a sale of a right to operate a high speed rail link with revenues underwritten, or a PFI contract in which the Government repays a proportion of bank debt even if the private sector defaults on the contract.
Other options include disposal of current Government assets in return for cash which is then used either for further investments or repaying borrowing. However such measures need to be considered carefully to achieve the desired effect. For example, selling the right to operate and maintain highways may not reduce PSND unless the underlying assets change hands permanently rather than just the contract for their maintenance.
Any method Government uses to support infrastructure investments should be carefully designed so that genuinely more efficient investment results, without undermining the progress made to date in improving the UK’s fiscal position.
If you would like to discuss the issues raised in this article, please contact Peter Dymoke via email or on 0131 260 4115