David Ruffley MP questions James Wardlaw on Private Finance Initiative

Tuesday, 14 June, 2011

On the 14th June 2011 David Ruffley MP questioned James Wardlaw on Private Finance Initiative.
Mr Ruffley's interview can be found below and the full text of the proceedings can be found here
Q49 Mr Ruffley: Thank you, Chairman. Mr Wardlaw, your paper in 2009 for the Policy Exchange talks about a UK infrastructure bank. How would that be an alternative to the PFI deals we have been talking about this morning?
James Wardlaw: I think we are sort of getting it. It is called the Green Investment Bank. It is clearly focused on renewables and green energy, which is a particular requirement of our economic infrastructure at the moment. What I hope for the Green Investment Bank is really the question I think now, two years on, in this respect. That is that I would hope it will play an important role in facilitating private finance, private sector capital, and that it will not just be about how it can dispense or invest £3 billion of its equity. It is about how it can mobilise and facilitate the private sector capital that is required for that investment.
Q50 Mr Ruffley: I am not quite clear, with respect, how that model improves conventional PFI and how it is different from conventional PFI.
James Wardlaw: I think the nature of the assets that we are looking to invest in as a country and create to meet the renewables target and so on has a very different set of risks to-
Q51 Mr Ruffley: Perhaps you could describe those, because I am interested in your proposal.
James Wardlaw: An offshore wind farm is a very different risk proposition to a school, and the nature of the risks that you are entailing as a contractor, both in the construction and the operation, are very substantially different. There is a lot of technology risk in some of the renewable areas, which is frankly unproven. Building a school or building a hospital is again, I am afraid, a very different proposition. The nature of the risks that the private sector would be taking on in that context I think are very different to historic PFI, if I can put it like that.
I do think that in terms of-and I come back to the original comment-the distinction between social and economic infrastructure, the economic infrastructure is really about where public spending is being directed and public sector investment. This Green Investment Bank has an important role to play, I think, in mobilising the private sector to invest capital in this sector.
Q52 Mr Ruffley: How will it differ from the kind of conventional PFIs that we have been talking about this morning?
James Wardlaw: Because of the capital structures, I think the nature of risk transfer is likely to be very different. Your conventional PFI transaction with 25 or 30 years on a 90:10 capital structure with a unitary charge that is payable by public sector authority, that standardised PFI formula, I don't think is necessarily appropriate for early-staged or even developing technologies in the renewable space for offshore wind, or whatever. I don't see the-
Q53 Mr Ruffley: Perhaps Mr Abadie can shed a bit more light. The conventional PFI that we have all been used to and we have been talking about today: is that a thing of the past? Do you think, this infrastructure bank, not just for renewables but for other forms of procurement, is the way ahead? Can you perhaps give us a sense as to what the differences are and what the advantages are, rather than traditional PFI?
Richard Abadie: I would start off by saying I am supportive of an infrastructure bank as well.
Mr Ruffley: Fine.
Richard Abadie: So I have no disagreement with James. At the end of the day, a bank is a source of capital. The question is-back to Dieter's argument about a RAB-what the cost of capital is. It is conceivable that if the Government set up an infrastructure bank, probably owned by Government, so it may count towards Government debt, which is a big question in its own right, it is likely to be able to borrow cheaper than you can borrow money at an individual project level for PFI.
To take us slightly away to PFI to where James was going in the renewable space, banks do not like lending to development renewable assets. I think what you are finding is if we do set up a green-
Chair: Why is that?
Richard Abadie: James touched on it: technology risks and everything else that comes with it.
Q54 Chair: Where are the risks going to go in these schemes that you are planning?
James Wardlaw: Equity, much more equity. A conventional PFI has a 90:10 capital structure. It has 10% equity. I think you will find in a lot of these renewable projects, where there is uncertain technology, you need a lot more equity risk than that.
Richard Abadie: Just to touch on that, James, it is even being done on our big utilities balance sheets right now, so arguably all equities.
Q55 Mr Ruffley: So which other utilities are you referring to?
Richard Abadie: Centrica, EDF. Those are the guys that are developing a lot of the renewable energy that we are creating at the moment on their balance sheet. PFI, to simplify, is a non-recourse structure. People put their money in and if it goes wrong at least there is no recourse to their balance sheets, arguably. On these deals you find the big utilities having to develop renewable infrastructure on their own balance sheets rather than using increasingly highly leveraged structures.
James Wardlaw: The UK banks probably have between 70% and 80% of their lending books in onshore wind. The rest of it is a very small proportion of the total, so the bank debt is a relatively small proportion of the total capital structure of these deals.
Q56 Mr Ruffley: Can I ask you to venture an answer to this question? If it is such a new and welcome model, why has it not been used before in this country, do you think? Mr Wardlaw?
James Wardlaw: Why hasn't the idea of a national infrastructure bank been used before?
Mr Ruffley: Yes.
James Wardlaw: Well, I think to some extent we have suffered without. Many other countries in Europe have benefited from having a national infrastructure bank or a state development bank: KfW, Eco in Spain, and CDC in France. I think that it has been an important part of the armoury of tools to enable infrastructure to be constructed in a public sector context.
Q57 Mr Ruffley: Would you say that HM Treasury are 100% supportive and 100% enthusiastic about the Green Investment Bank?
James Wardlaw: No, but you would have to ask them. You would have to ask them, and I used to work there as-
Q58 Mr Ruffley: You used to work at the Treasury, and I am just asking you to give us an educated assessment as to why, if this is such a great alternative, and you have been advertising its benefits and advantages, it is not being enthusiastically embraced by HM Treasury?
James Wardlaw: This Committee-
Mr Ruffley: No, it is a serious point: the kind of technical objections that a Government Department might have with this proposal and this model.
James Wardlaw: I think that their concerns go to the heart of the issue about regaining control of the public finances. That is fundamentally the issue here. It is about the state of the public finances. £3 billion of equity is a massive commitment to the Green Investment Bank in the context of the state of the public finances, and I think that that is the primary driver.
Q59 Mr Ruffley: So you think it is a problem with deficit reduction rather than with the actual workings of the model?
James Wardlaw: Correct.
Q60 Mr Ruffley: Final question for Professor Helm: you spoke very eloquently about intergenerational equity issues, and I am very struck by what you said. I just have this question: you are quite right to remind us that we don't have a proper understanding of the assets of the UK right across the piece. How difficult can it be to draw up that set of assets on a national set of accounts in a fairly reliable way? That is the first question. The second question is: have you spoken to Ministers about this? Because I notice that you advise DECC and you advise Defra, and it struck me as a very large lacuna in British policymaking, and I wondered whether it would it be very expensive to do, and what have Ministers said about the concept?
Professor Dieter Helm: It depends whether you want a perfect set of accounts. Then it is really difficult. In practice it is to just get on with it. "Let's have a look at what has happened to the oil Let's see what electricity networks looks like. Let's have a look at the water networks." You just do it pragmatically. We are never going to get a perfect replication of the assets in this economy, but we get a pretty handle on the big items pretty quickly and we can tell whether we are depreciating rapidly or not. So, the answer to that is it is not difficult.
Secondly, have I talked to Ministers and others about it? Yes, I was one of the three advisors to the project set up under the National Infrastructure Plan. It is in there. They would look at extending the RAB-based model; I have been working on that. In some sense it would be quite reassuring to discover that there is some sort of huge flaw in this idea and some reason why you can't pursue it.
Mr Ruffley: Yes.
Professor Dieter Helm: My take on this is nobody disagrees, in principle, it is just they don't like the fact of what it might reveal. Think about it. Supposing it is true, supposing that we have been running down infrastructure for the last 25 years in this country at the same time we have been expanding our public debt, and so on, supposing our electricity system is not fit for purpose, supposing our water system needs to be investigated, supposing our road system needs upgrading, supposing our rail needs to be done, supposing we depleted the North Sea, then what it would reveal is we are much worse off than we thought we were, because essentially our underlying asset base has shrunk but we have tried to keep our spending up higher. This is, in that sense, quite a can of worms for people to look at, because it raises profound questions about how we are, in our generation, tailoring our spending to the needs of future generations. We should hand on the infrastructure. That is the most basic sense of a sustainable economic policy, so I suspect that what it might turn up maybe somewhat alarming to some, but can we do it? It is pretty straightforward. Is there any objection in principle? How could there be? How could you not want to know the answer to this question?