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Privately financing city infrastructure

Public-private partnerships will be needed to deliver major city infrastructure by 2040, but requires the right framework of strategy, leadership and regulation

Privately financing city infrastructure

For decades debate has raged over the role (if any) of private investment in public infrastructure and services, especially following the privatisation of many of the UK’s utilities in the 1980s and 1990s and the recent collapse of Carillion. But despite the controversy, city regions are increasingly looking at private providers to deliver vital infrastructure services. However, with various models for privatising infrastructure, how can they balance the risks with the potential rewards?

As the competition for foreign capital investment into cities grows, using private capital is one method available to governments and city regions seeking to overcome deficits in infrastructure funding for cities. In the UK, since 2010, a quarter of a trillion pounds has been invested in infrastructure to help enable the UK’s cities. This is because infrastructure investment acts as the catalyst to attracting private sector development. For example, having great rail, road and air hubs are key components of any successful city. HM Treasury finds that the value of formal Private Finance Initiative (PFI) projects (and PFI’s successor, PF2) have a capital value of £60bn.

Figure 1: Size of the Government’s PFI and PF2 portfolio, December 2016

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Source: HM Treasury

Some cities, such as London, have undertaken research to find feasible mechanisms to work with the private sector to create the conditions that will enable the urban system. The report ‘Mind the Gap’ looks at how Greater London responds to public investments, and the long-term socioeconomic ‘cost of not’ making such investments. The report argues that the gap is caused by chronic shortages of public funding and financing for city investments, which delay or prevent public investments, causing permanent losses of future housing availability, environmental quality, social balance, economic growth, and government revenues. Recommendations seek innovative public/private solutions that rise to the challenge of funding and financing public investments in London and other cities.

The Centre for Cities’ Funding and Financing Inclusive Growth in Cities report outlines a four-stage approach for blending public and private funding and financing for the benefit of the city, as cities recognise the need to find ways to increase revenues, create returns on their investment, encourage investment from other stakeholders, and coordinate the spend of organisations within cities to support better outcomes for residents.

However, the city cannot develop without some government support for partnerships between public and private sectors. Cities will need a public sector vision and strategy, with some public sector enablement funding, coupled with private sector financing and a strong delivery capability. It seems metro mayors (which we write about elsewhere) are acutely aware of the need for this support, and are seeking to act as the facilitator between the public and private sector partner with a view to bringing the two together.

UK cities have some excellent examples of public and private sectors coming together to deliver in circumstances where neither could deliver alone. For example, water and sewer systems are essential services for the public, while airports and sea ports provide the international connections the UK needs to grow and prosper.

Cities need to create (or press the government to create) a regulatory framework which protects consumers, rewards efficiency and innovation, and gives confidence to investors. Every city needs a ‘kick start’ by the public sector which provides the aspiration that gives the private sector confidence to make the investment necessary for our cities.

The attitudes of the major political parties towards this issue differ sharply, with Labour expressing deep scepticism and arguing for the return of key services to the public sector. The Conservatives refer regularly to partnerships between the two sectors in their 2017 manifesto, though have said very little specifically about the formal future of PFI and Public Private Partnership (PPP). In Scotland, the Scottish Futures Trust promotes a non-profit model.

Whether PFI returns or not, partnership between public and private sectors is the key to underpinning the potential from our cities by 2040, and growth could be inhibited if politically-acceptable models are not found soon.

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