I know, I know: this inaugural column should follow the theme of the edition—water. I should write about water finance. Maybe looking at results-based internal transfers. Or how to use government budget, donor grants and IFI funding to encourage development goals which fit so well with PPPs, like the recent work in Indonesia and Honduras, and using those future transfers to secure debt. Then again, I could talk about using secure revenue streams from water to access cheaper and longer debt, like the water revenue securitizations (if I can still use this word in polite company) that used to be so popular in the U.K. These of course foreshadowed the new French practice of securing bond issuances with Dailly assignments of government payment obligations. But let’s come back to these topics in future editions. Today, I want to talk about the death of PFI credits.
As we know, PPPs can be a very attractive option for those concerned with the efficient management of the government balance sheet, for long-term supply of national infrastructure. But line ministries and local governments may be less convinced by PPPs. After all, PPPs cut into budget allocations, and the efficiencies available through PPPs often do not translate into larger budget allocations for the line ministry or local government. So ministries of finance institute PFI (private finance initiative) credits or similar mechanisms. Exhibit A: India’s viability gap fund (VGF), which (maybe due to its evocative name) has successfully inspired VGFs in a number of other countries.
These extra-budgetary sweeteners encourage line ministries and local governments to adopt the procurement method with the most benefits for the nation, where the government’s planning and budget process does not create enough of an incentive. The U.K., however, has put the PFI credit out to pasture. Maybe local governments and their ministries have been evangelized, no longer needing encouragement to use PPPs when merited. Maybe the new Infrastructure U.K. is meant to create political incentives to make procurement decisions based on value for money (VfM). I hope they are right. But it would be a shame if the U.K. lost some of its infrastructure dynamism for the small price of PFI credits. Babies and bathwater – do we have to throw out one with the other? See, we’re back to talking about water again. And in both cases, sometimes we need to be reminded of what we already know.