12/1/11

Selling bonds -- a cheaper alternative to P3s

As noted earlier, the British government is reviewing its use of public private partnerships (P3s, or, as the British call them, PFIs) for the development of public infrastructure like new hospital buildings.  The government now says it's the ‘end of PFI as we know it’.   


Unfortunately,  they seem to be more interested in simply pulling pension plans and foreign money into the PFI vortex.


The PFI advisor to the British House of Commons Treasury Select Committee, Mark Hellowell waded in to this mess earlier this week. Instead of wrapping pension plans into PFIs, he points to a cheaper way to involve pension plans in infrastructure.
"The Treasury is currently pulling its hair out trying to find ways of bringing pension funds into infrastructure investment. But the cheapest way to do this is, of course, to sell bonds to them.  They will currently buy them at a real interest rate of something like minus 3% – not bad for projects that will put people into work in the short-term and increase the economy’s productive potential in the medium and long term."
The cheaper way, it seems, is pretty much the traditional public sector model for public infrastructure. Not PFI.

Moreover, Hellowell notes government  "officials want to find a way of transferring some risk back into the public sector to ‘credit enhance’ the deals, allowing associated bond issues to achieve the triple-A rating that institutional investors require."
"The challenge, which has eluded successive governments, is to do this while maintaining PFI’s ‘fiscal advantage’ – its ability to allow investment to occur without the related borrowing showing up on the headline measures of government deficit and debt. This, after all, is the reason successive governments have found the PFI so irresistible. While the balance sheet benefit of PFI must be retained, there is a political imperative for change – even if it’s only a change of acronym."
In other words, the government wants to transfer risk back to the public even while they keep the massive PFI debts off the public books.  


There's a word for that isn't there?

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