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Private finance for infrastructure needed, but Government must ensure value for money warns watchdog


The Government must ensure the value for money of projects included in its national infrastructure plan as it takes steps to encourage private investors, the public spending watchdog has said.

A new report from the National Audit Office (NAO) warns of the five biggest risks to consumers and taxpayers as the Government increasingly looks to private companies to wholly own and finance much of the £310 billion in infrastructure spending needed by 2015. It calls on the Treasury and related departments to be open to "refining their prioritisation" of projects if affordable funding is not available.

"Economic infrastructure keeps the country running," NAO head Amyas Morse said. "Demand for infrastructure is set to increase, fuelled by population growth, technological progress, climate change and congestion. But there is a lot at stake in taking forward the national infrastructure plan in an environment of straightened resources, with real risks to value for money and uncertainty about the sustainability of piling costs on to consumers."

The report also recommends more transparency on the financial impact of planned investment.

According to the Treasury's update on the National Infrastructure Plan, published alongside the Autumn Statement last month, the 'pipeline' of economic infrastructure projects due to be taken forward to 2015 is worth £310bn. Perhaps the most significant part of this spending relates to energy, with £176bn earmarked for projects including electricity generation and investment in renewable energy. However, investment is also needed in areas such as transport, water, waste, flood defences and telecommunications infrastructure.

Among the risks to achieving value for money identified by the report was the potential for error when forecasting the long-term need for new infrastructure. It also warned that the Government had not yet considered the "full impact" of its infrastructure programme on consumers, particularly as individual departments began to consider charging consumers to use public assets as a funding mechanism. No "overall assessment" had yet been undertaken on the "cumulative impact" of user charges, tolls, increased fares and bills in individual sectors on consumers, it said.

The report also warned that the use of Government guarantees to bear some of the project risks, as proposed in July last year, could ultimately expose taxpayers to "substantial losses" should these risks materialise. The 'UK Guarantee' scheme was designed to enable major infrastructure projects which are struggling to obtain funding, such as the London Underground Northern Line extension to Battersea Power Station, to take advantage of the Government's "hard-won fiscal credibility". Guarantees are available to financially credible, nationally significant infrastructure projects, provided that work can begin within 12 months of the guarantee being given.

Infrastructure expert Graham Robinson of Pinsent Masons, the law firm behind Out-Law.com, acknowledged the concerns outlined in the report but said that the Government needed to do more to attract private investment.

"There is significant capacity in our beleaguered construction sector available to build the infrastructure that Britain needs, but the Government needs to find new ways of attracting private investment into a wider range of infrastructure assets," he said. "The construction industry has been calling for more clarity on the National Infrastructure Plan and there is no doubt that key infrastructure is in need of modernisation not only for the UK's business competitiveness but for the nation's next generation."

"Looking at this more widely, the financial crisis has meant the Government is unable to fund the growing need for new infrastructure projects for Britain to compete for valuable business from fast growing emerging markets. Ultimately, it is the private sector that needs reassuring because without it Britain will continue going around in circles and if we do not invest in infrastructure then Britain's economy could stagnate," he said.

A potential solution could be to move more of the UK's publicly-funded infrastructure assets into a Regulated Asset Base (RAB) model, reflecting the "successful" investment model currently seen in the water sector, he said. A RAB model involves users being charged a fee, controlled by a central regulator, to access an asset in Government control.

"The motorway and trunk roads network is a sector where investment has been cut as it is a publicly-funded asset and the Government doesn't have the money to invest, yet Britain's roads need significant investment over the coming decade," Robinson said. "Moving the trunk roads network into an RAB model to attract private investment is something that the Government should be looking at. RAB models have the ability to attract large amounts of private capital into infrastructure through a transparent and consistent mechanism that reduces investor risk and places a cap on consumer prices."

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