After the deluge

Cuts to government spending will force governments to increase private provision of public services, argues Michael Kapoor.

Everything is wilting under this recession, and that includes infrastructure investment. However, optimists reckon that private investment will actually end up being bolstered by the problems. And news from the UK supports this view. Governments are running out of money.  Therefore if they want anything built – or operated – they’ll need increasing amounts of private money.

Michael Kapoor

The UK’s latest budget made for grim reading, with the government planning tax hikes and spending cuts as it forecast the economy would tumble 3.5% this year. Capital investment is especially hard hit, and one of the first casualties seems to have been the so-called ‘Titan’ prisons, three giant jails planned to take the heat out of a massive expansion of prisoner numbers under this government. Now, the government seems to have scrapped these plans in five of five smaller jails, which will be funded through the private finance initiative.

Largely, this is down to the lousy economy and the lousier state of the government’s finances. After much toing and froing, the government seemed likely to fund the Titans through a mix of public money and property sales. Now, the money isn’t there, and a collapse in property prices means the sums didn’t add up anyway.

More intriguing is the likely return to PFI, which the UK seemed to be cooling towards since Gordon Brown became prime minister in mid-2007. That was especially marked for prison building, which originally marked quite an expansion of the role of private firms in public services. Rather than simply constructing and maintaining the buildings, as in a standard PFI project, the private contractors actually ran the custodial side, employing prison guards. Most prisons built since this government took power in 1997 followed this route, and the results have been more than a little controversial.

Let's not pretend the recession is good for business. But it is helping to unlock some huge new sources of work

Michael Kapoor

There were claims of cost cutting leading to a weaker prison service. And that probably explains the original decision to spurn PFI for the Titans, which was quite a U-turn in policy: until then, the government had said it would use PFI for any new prison building.

Now, lack of cash and chaotic property markets have forced the government back to PFI (the decision to build five smaller jails largely reflects complaints that the three planned prisons were too big for effective prisoner care, and they were anyway proving almost impossible to gain planning consent for). The shift towards public private partnerships for prison building will likely be repeated around the world, with France among those already shifting away from public building.  But for the investment community the questions go beyond a whoop of glee at big new social markets emerging, because longer term this could change the very nature of social infrastructure development.

Until Brown took power, the UK had been shifting increasing amounts of social provision onto private firms, from healthcare to prisons and waste disposal. Now, lack of cash is forcing Brown to look again at shrinking state provision. It’s a colossal new market opening up. And it could require a very different type of investor, perhaps involving financial investors teaming up with service providers.

Let’s not pretend the recession is good for business. But it is helping to unlock some huge new sources of work.