Privately-Financed Roads in Britain: A Policy Assessment
For many years the UK government has sought to move activities from the public to the private sector; government’s role evolving from being a provider to being a procurer of social infrastructure and related public services. This policy gained considerable momentum in the early 1990s through the Private Finance Initiative (PFI) – introduced under a Conservative administration but subsequently embraced by New Labour. The PFI departed from earlier policy initiatives developed to harness the skills and experience of private enterprise insofar as it involved the use of private, at-risk capital.
Fifteen years on, my PhD thesis looks at the legacy of the PFI by examining its application in the roads sector. The PFI is widely discussed in the literature however such discussions are often descriptive, conceptual or ideological. This thesis assesses the performance of PFI roads by examining the evidence.
The research findings reported are set in the context of the policy imperative that led to the development of the PFI: the need to modernise an infrastructure estate that had suffered years of neglect while, at the same time, demonstrating fiscally prudent governance. Four new streams of research are reported exploring project risk – in the form of construction and then traffic risk – and examining the ex ante economic and ex post financial performance of PFI roads. A mix of data and analytical methods are used including literature reviews, internet-based questionnaires, semi-structured interviews, and statistical and accounting analysis.
Key conclusions from the research include the fact that the private sector cost of capital for the early PFI roads was around three percentage points higher than the cost of Exchequer finance – lower than previously reported. This financing differential has subsequently narrowed further, but has been more than offset by a reduction in the Treasury’s discount rate from 6% to 3.5%; raising the efficiency hurdle for privately financed roads today. Turning to policy, PFI roads have secured fixed price on asset delivery and on-time completion, and there is evidence of successful whole life cost risk transfer. As a portfolio, the Highways Agencys’ PFI roads programme continues to demonstrate value for money when tested against the lower discount rate or reduced optimism bias uplifts. In terms of benefits, this suggests that the original policy of exposing the roads sector to commercial disciplines was more robust than some of the literature has suggested. Recommendations are made for exploiting these commercial disciplines further.