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Industry Considers Alternatives to PFI

The National Audit Office has voiced its concern over using private finance in public procurement, arguing that such a practice needs to be challenged more. In its published report last month, the National Audit Office warned about the increase in the debt finance cost since the economic crisis, arguing that the Treasury must re-examine the private finance initiative (PFI) and find alternative ways to fund infrastructure and related facilities services.

Although PFI is currently the most popular form of public private partnership, it is important to remember that there are alternatives. Several other funding structures, such as the regulated assets based (RAB) and the tax increment funding (TIF) models, are now being increasingly considered by the industry.

With the RAB model, investment is based on a regulated, income-generating asset through long-term borrowing, which minimizes risks to ensure affordable financing. The key feature of RAB is that the risk factor, which involves the sunk costs associated with capital investment, is transferred to customers.

Currently, the RAB model is used in the UK mostly in the regulated utilities sector and has shown success in projects established in social housing, airports, and energy. However, according to last year’s National Infrastructure Plan, it is clear that the government wishes to extend the use of RAB to other sectors.

Nonetheless, RAB is not suitable for all cases as it can only be used in sectors with a revenue stream. Road infrastructure, for example, would not be able to utilize RAB. This is because in order to generate revenue for roads, the government would have to impose tolls, something that has not yet been successful in the UK.

The TIF, on the other hand, funds current projects through future tax gains. The TIF, for example, was approved by the Scottish government just last month as a means of financing the £84m project to redevelop Edinburgh’s waterfront. Through this TIF project, Edinburgh will be able to find “enabling” infrastructure works, including the building of lock gates, a cruise liner terminal, esplanade, and link road.

 

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