Capital spending: how protected? by Mark Hellowell

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Over the last year, plans for two large hospital projects have been in development – plans which, in many respects, look very similar. Both involve the replacement of old, physically denuded facilities in poor parts of northern England, one in Hartlepool, the other in Merseyside. Both involve serious amounts of capital investment – £450 million in the former case, £320 million in the latter.

But the two projects differed in one important respect: the proposed method of financing. On the Hartlepool scheme, an innovative new form procurement was to be adopted, in which the private sector contractor would provide a small proportion of the capital required to build the hospital, but with the lion’s share coming from the public capital budget. Liverpool’s scheme, meanwhile, is a straightforward private finance initiative (PFI) project.

Both projects were, last week, seeking government approval prior to launching tender advertisements for bidders. The outcome was probably predictable. Despite George Osborne’s pre-election diatribe against “Labour’s discredited PFI model”, which he promised to reform, the new Chancellor has approved the Liverpool scheme, whereas the Hartlepool scheme has been rejected, and since cancelled.

I say predictable because, whatever the new government might feel about PFI (which Osborne’s predecessor Norman Lamont introduced in 1992), private finance offers advantages to finance ministers that few can resist: namely, the ability to provide capital investment now, without that investment scoring immediately in the national accounts. This allows a superficial relaxation of the budget constraint, and is great news for short-termist politicians.

The flexibility is superficial because all the money to repay the debt ultimately has to come from the public coffers – just as it would if the government chose to fund the investment by borrowing on its own account instead. The problem with borrowing is that it has an immediate impact on the country’s annual deficit and the total amount of outstanding debt, and coalition policy is to reduce both of these fast, apparently at any long-term cost.

In reality, Hartlepool’s chance of getting more than £400 million of public capital always looked rather whimsical.

In its Budget yesterday, the coalition government promised to maintain capital spending at the level projected by the last government. What they neglected to say was that Labour had planned to slash capital spending as a proportion of national income down to a level not seen since the mid-1990s.

Mark Hellowell is a research fellow at Edinburgh University

About Mark Hellowell

Mark Hellowell is a lecturer in health systems and public policy organisation at the University of Edinburgh. His special interest is public private partnerships, and he has been an adviser to the Treasury select committee’s inquiry into the private finance initiative. Mark has published and broadcast widely on these issues.

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