Extracts from Mr Major’s speech in Glasgow on 5th May 1989 on ‘Private Finance for Roads’.
CHIEF SECRETARY TO THE TREASURY:
The private sector, too, has an important role in infrastructure development – and, I believe, one that will continue to grow.
Already the infrastructure in areas like telecommunications, air transport, gas, is now provided by the private sector, thanks to privatisation.
The same will soon be true for water and electricity. And we hope in due course, British Rail.
Treasury Ministers have been in the forefront of privatisation, the most radical way of increasing the private sector’s role. We have also encouraged imaginative new projects for involving the private sector in activities that remain the Government’s responsibility. The Government Data Network, for example, is a major data transmission project which is being financed and run entirely by the private sector for Government. Yet despite that the view often prevails that “the Treasury” or “the Ryrie Rules” are a huge stumbling block to greater private sector participation in the infrastructure. The Ryrie Rules are thought to be incomprehensible, and to hamper private finance by setting impossible hurdles.
It is curious that the Department that has been in the forefront of increasing the role of the private sector through one policy should be accused of blocking it through another. So let me try and clear up this confusion once and for all.
Let me start by formally retiring the Ryrie Rules. They have clearly outlived their usefulness. They were drawn up almost a decade ago, in response to a problem that has now largely gone away.
The question then was: on what terms should nationalised industries be allowed direct access to private sector risk capital? 8 years later, many of those industries are no longer in the private sector at all. In short, privatisation has helped to make the Ryrie Rules obsolete.
The question now is different and much more difficult. It is this: how can we involve the private sector in building the infrastructure where the Government is the major provider, with responsibility for large national networks; where it may also have statutory responsibilities; where services may be tax-financed and free or heavily subsidised at the point of delivery; and where competitive market pressures are often weak, or non-existent? Roads are a hybrid: most of the network is likely to continue to be financed by the taxpayer, but there is considerable scope to increase the role of the private sector. Today let me make clear how we intend to approach private finance schemes for roads.
The issues raised by involving the private sector in financing roads are new and often complex. But we must overcome them, because we believe it is important to make full use of the private sector’s skills here, as elsewhere in the economy.
I do not see any difficulty in encouraging road schemes where the private sector takes full responsibility for success or failure of the project: enterprises like the Channel Tunnel – where the private sector is genuinely in charge, and in competition, with all the benefits, and risks, that brings and where the return does not depend in income assured by Government contracts, subsidies or guarantees.
Let me make it plain that the Treasury welcomes such projects, and does not seek to impose conditions or constraints on their development, any more than it does on any other wholly private sector enterprise.
But not all schemes are so clear cut. There is a grey area, where capital costs are privately financed but the taxpayer’s interests are still directly or indirectly engaged. For example, for one reason or another the Government may carry the ultimate liability if the scheme goes wrong. In such cases we must safeguard the taxpayer’s interests as well as the user’s.
There should be no doubt that we are keen to see proposals for privately financed roads within the public network including new forms of collaboration between the public and private sectors. And we are happy to approve them, providing they offer better value for money than the publicly funded alternative.
In essence, our approach to private finance is simply to apply our wider policy of seeking better value for money throughout the public sector – in the interests of taxpayers and users. Value for money policy is central to our efforts to revitalise the public sector – as the private sector has been revitalised over the past decade. The acid test then is whether private sector involvement means better value for money.
I do of course recognise that judging value for money can be difficult, especially in the case of large or complex projects. But it is necessary. And while we cannot ignore the fact that the Government can raise money relatively cheaply because it is a large low-risk borrower, we must also take account of the benefits that tend to go with private finance, such as improved efficiency, lower costs, and reduction in the risks falling on the taxpayer. This is the private sector’s competitive edge, and where it produces clear benefits, private schemes will succeed and the Treasury will not stand in their way.
But we are not interested in pure funding vehicles, and sale and leaseback arrangements, whose sole purpose is to get round our own public expenditure controls. They will not pass any genuine value for money scrutiny. Nor should they. We have made it clear that we disapprove of local councils who lease parking meters. There is no room for that sort of creative accounting in Central Government.
Value for money is therefore essential, and is not an impediment to worthwhile private finance. But there is one concern which many believe is at present inhibiting private finance and which I would like to tackle today. I refer to the argument that there is no point in promoting privately financed roads because the Treasury will simply claw it back by reducing public expenditure.
Of course, in a general sense, we take account of what the private sector is doing in deciding our public expenditure priorities: we cannot afford to duplicate private sector provision. We have better ways of using the taxpayer’s money.
Where a Department already has public expenditure provision for a project which is subsequently financed privately, the normal presumption is that the money saved should be given back, so that we can look again at what to do with it. But it is always open to us to allow a privately financed scheme to add to total provision.
Roads are, of course, a key priority. I have already made it clear that we want the private sector to bring forward new and imaginative schemes. And in any case, the actual expenditure on a new road scheme will tend to fall beyond the time frame of our public expenditure surveys, because of the time needed to get the necessary planning consent.
To encourage private schemes to come forward, I today give the explicit assurance that I will not seek reductions in the road programme on a scheme by scheme basis to offset privately financed projects.
Of course if private roads take off in a big way, the Government may need to review the scale of the public sector’s own commitment to avoid duplicate expenditure. That will simply be part of the normal reassessment of priorities implicit in any sensible control of public expenditure. But I believe that the right kind of private sector schemes will, in time, produce a higher level of infrastructure investment in the economy, as well as better value for money. The way is now open for the private sector to bring forward its schemes and its skills secure in the knowledge that we will be keen to endorse them provided they provided value for money for the taxpayer and the user.