Just what is the price of private sector participation in UK infrastructure? Judging by the UK government’s recent announcement, it is pretty high – £40 billion in fact. For that is the amount of loan guarantees needed in order to unblock a number of privately financed infrastructure projects that might otherwise fail to get of the ground.
While potentially a welcome development for the infrastructure industry (if not exactly cheered unanimously as a holy grail) the issue of guarantees do however raise the spectre of something less cheer-worthy.
That is associated moral hazard which could threaten to take the industry into potentially controversial territory.
After all, the message from the UK government is that privately funded infrastructure projects which were supposed to transfer construction, financing and operational risk to the private sector actually need government guarantees for the private sector to sit at the table. Otherwise, they are a non-starter.
This is dangerous and potentially circuitous that may eventually lead people to ask: why use private sector capital at all, if it’s more expensive than public money and now even needs government guarantees?
Following the outbreak of the crisis, the public and private sectors had a readymade answer to this question: private capital is worth using because the private sector is more efficient than government in running these assets, and as such, public-private partnerships (PPP) are still worth the extra cost.
But unfortunately for the UK Treasury, which announced the £40 billion figure, its guarantees scheme comes in the midst of one of the most damaging private sector scandals in recent memory. Private security firm G4S, responsible for handling security at the Olympic Games, was forced to embarrassingly admit, just a few weeks before this Friday’s opening ceremony, that it would be unable to fulfil its contractual obligations.
In a nutshell, the security firm said it wouldn’t be able to provide enough personnel for the games, even though that’s exactly what it was paid to do. To make matters worse, G4S’ embattled chief executive then went on to tell Parliament that his firm fully intended to keep its £57 million management fee, since it still expected “to deliver a significant amount of staff”.
Needless to say, G4S’ blunder opened the door to a maelstrom of anti-private sector rhetoric and reignited the debate on the suitability of outsourcing traditional public services to private companies.
It’s precisely in this environment that people will be asking why the government is not only proposing to outsource more infrastructure to the private sector, but going further and offering guarantees in order for the private sector to come to the table.
Of course we in the industry know how useful these guarantees can be to kick-start investment in these difficult times. We also know they can potentially unlock a big source of capital – institutional money – that has otherwise been unable to participate in new-build projects. And finally, we know that the bulk of these guarantees will never be drawn upon.
But the industry doesn’t exist in a vacuum. At a time when the private sector is under increasing scrutiny from the media and the public, the government and its private sector partners need to be ready to highlight the positives of such a scheme – or risk facing a ‘villagers at the gate’ type of moment in a few years’ time.