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Public infrastructure rebuild must go on

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The private finance initiative (PFI) was, in its way, a perfectly sound idea.

The word “private” was of key importance: money for public infrastructure projects would be provided by a private sector company, which would also design, build and manage the school, hospital, railway or waste plant.

Councils, health authorities and other governmental bodies would then pay a service charge to use the facility.

But because of the collapse of confidence in the global financial system, banks have become very cautious about lending. PFI schemes cannot in many cases raise all the money they need to go ahead, even though government, in effect, stands behind them.

It is such a problem that the£3.8bn Greater Manchester Waste PFI needs Treasury cash to sign off the deal.

The Treasury has had to create an infrastructure finance unit to lend money to PFI projects that cannot raise it from the banks. The money will come from Whitehall ‘underspends’.

Thus, we have arrived at the point where public finance will underpin private finance deals. This is a policy development worthy of Alice in Wonderland.

Public finance will also be needed for widening the M25, Building Schools for the Future projects and for some hospitals.

The Treasury, presumably, hopes that future projects will be fully privately financed once the economy starts to grow again and the banks have rebuilt their balance sheets. But in the short term it is hard to see any logic to a publicly financed PFI.

Next week’s Budget will have to address the issue of whether the government wants to signal a wider contraction in public sector capital spending.

In past recessions it has been traditional to slash investment to maintain current programmes.

The present government has made significant efforts to improve the dilapidated asset stock of Britain’s public sector.

It would be a pity if the country went back to under-investing in its infrastructure.

Even after seven or eight years of increased capital spending, this country’s roads, railways, schools, hospitals and waste facilities are by no means the world’s newest.

It would be better in the long term to squeeze revenue spending slightly harder if this would protect capital projects.

Local government is the guardian of an important chunk of Britain’s capital asset stock. There might even be a return to council house building.

Authorities have sufficient reserves and investments to risk using a tiny proportion of them to sustain capital expenditure. PFI might have come to the end of the road, but other methods of raising finance have not.

The chancellor should signal that in the recession of 2008-10 there will be no let-up in rebuilding the public infrastructure.

That would be a significant legacy for Mr Darling.

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