Mark Williams, Governments Board Member, CIPFA
Many see the Brexit vote as a political protest against rising levels of income inequality. While finance and economic arguments were made that individuals and communities would not be as well off as a result of Brexit than they would have been otherwise, these arguments appear not to have resonated with individuals and communities who believe that they are economically disadvantaged. This seems to have been particularly the case in NE and NW England. There is evidence from an infrastructure perspective to support these regions concerns – the Institute of Public Policy Research suggests spend on infrastructure in London to 2021 will be £1,870 per person while in the North of England will be £280 per person.
I have always advocated the progressing at pace with a series of infrastructure projects across the country in a programmatic fashion. Brexit makes this more urgent. I think the case for moving forward with HS3, Northern Powerhouse, Midlands Engine, energy efficiency schemes like RE:FIT, defence, schools and health estate investment and rationalisation is stronger than ever. The key message from Brexit is the need to accelerate this infrastructure delivery to deliver a more inclusive growth strategy.
A programme of accelerated infrastructure delivery is likely however to expose skills shortages in the sector. The further education sector, including specialist project specific colleges will therefore have a key role in addressing skills shortages. Organisations like CIPFA will also need to continue to support capacity building by delivering a range of Best Practice Financial Management training, including the HM Treasury’s better business case accreditation and the World Bank’s PPP accreditation.
Autumn Statement
Fast forward to the Autumn Statement, given that the economic benefits of spending on infrastructure are well understood, the new government has recognised the need for further economic infrastructure investment, tying it specifically to productivity. It is clear that the UK faces a productivity problem, a 'productivity gap'. While in 2006 the UK productivity current price GDP per hour work was in line with the G7 average, since 2006 it has fallen significantly behind – with the G7 being 118% as productive on this basis as the UK in 2015.
Part of the reason for this is our ageing infrastructure. Hence the creation of the £23bn National Productivity Investment Fund (2017/18 to 2021/22) that will invest in housing, local roads, digital communications and R&D is good news. This productivity gap is not consistent across the UK. Productivity in London is around 50% higher than the North of England. We need an infrastructure policy that positively addresses this gap. Instead HMT’s current approach, which funding for the NIPF will follow, if left unchecked may increase the productivity gap across the country. HMT business case orthodoxy is to select projects based on the optimal balance of economic and social benefits, costs and risks (the VFM). This makes it more difficult at a project level to make the case to invest outside of London given the lower 'gross value added” to GDP from investments elsewhere.
Whilst the Autumn Statement promises of funding for new infrastructure projects is very welcome the government needs to move quickly to provide further details. Financing for projects is not currently a problem, the issue is instead around the lack of de-risked projects to repay the available financing. A specific pipeline in a programmatic style should be announced as soon as possible so financing and resourcing can be sensibly addressed. Lots of smaller projects under a broad strategy, like the five year Roads Investment Strategy, gives certainty and is a good way to stimulate local spending.
In a few areas detailed pipelines do appear to be being worked up. The Autumn Statement suggests that a more material pipeline of PPP/PF2 looks to make a return. It was stated that a list of initial PF2 projects to make up a pipeline would be set out in early 2017 and that these would cover both economic infrastructure and social infrastructure. The renewed focus on social infrastructure is very welcome as in some sectors the existing infrastructure is looking beyond its economic life.
Sadly, there is lots of confusion in the UK around PPP/PFI/PF2. Simplistically, the private sector is always going to be involved in the design, build and maintenance of property and infrastructure. In some cases they also pick up operations. Also, when running a £1.7trn government debt the private sector will also finance this. PPP/PF2 merely offers a procurement route to integrate these components in a whole assets life fashion. Given that 800 PFI/PF2 projects have been signed to date, all being subject to HMT compliant business cases, then the VFM argument will have been made 800 times.
A programmatic approach
A programmatic approach across government would help with productivity and would help support another Autumn Statement announcement around a review of infrastructure performance. Government plans to work with industry will identify ways to improve quality, cost and performance of infrastructure spending. One angle this review might consider is the decision making process within public services. HMT state that following the better business case approach should save 40% in terms of time and cost of developing a business case and result in better outcomes. Arguably infrastructure project performance issues and UK productivity issues arise when the decision making process within public sectors (the business case) does not follow best practice.
Finally, there remain significant public service efficiency opportunities. Picking up on the PFI topic, significant savings could be made in existing PFI arrangements with a bit of central coordination from departments, responding to the HMT operational efficiencies programme. Also, based on the Whole of Government Accounts (WGA) as at 31 March 2015 public bodies held £850bn of property, plant and equipment (fixed assets). Despite all of the discussions around estate rationalisation this has continued to build in value since the first WGA in 2009-10 (£700bn). Also, anecdotal evidence suggests there have been relatively few site disposals, with defence estates potentially being the most active with almost 100 sites announced for disposal this year. While there is good work ongoing thinking about asset consolidation, significant efficiencies can be achieved by rationalising the public estate at pace.