ATTRACTING PRIVATE FINANCE FOR INFRASTRUCTURE PROJECTS: LESSONS FROM THE CHANNEL TUNNEL RAIL LINK

Abstract

The development of the Private Finance Initiative in the UK appears to offer much promise of facilitating the government's objective of doubling investment in transport infrastructure. The Initiative offers more finance, sooner and it offers the potential of building and managing that infrastructure more efficiently. Transferring responsibility for production to the private sector can lead to greater efficiency as the transport operator bears the risk of his actions and thus has the incentive to behave in an efficient manner. Transport investment generally, and the Channel Tunnel Rail Link in particular, dominate the PFI investment programme. The policy has limitations, however, as illustrated by the CTRL project, which is marked by a very high degree of commercial (revenue) risk and a very low revenue increment and benefit to taxpayers. The PFI proceeded despite this high risk only because revenue risk was retained by the government. In the past, borrowing limits and taxation levels probably provided stronger disincentives on approving projects with low return on investment and dubious economic benefits than the current PFI regime. The PFI process does not have the same degree of disincentives on politically-driven schemes; the danger is, then, that poor quality transport infrastructure - such as the CTRL - will be approved, at the expense of more productive projects. (A)