The private sector needs to fundamentally change governance of its infrastructure companies if it is to build trust and maintain a prominent position in the ownership and delivery of infrastructure. This has two elements to it: a change in the infrastructure model to a lower cost long-term model and for both new and existing owners of infrastructure, a fundamental review of governance and goals, which is the key focus of this paper.
The Infrastructure Forum's recent paper 'Alternative Models for Funding and Financing Infrastructure' gave an overview of public and private sector models for procuring infrastructure, arguing for a mixed economy of public and private sector delivery, where each sector benefits from the other. For each project, the correct model should be determined depending on the particular objectives around risk transfer, flexibility, cost of capital and cost certainty.
The TIF paper advocates, in particular, a greater use of the approach used on Thames Tideway Tunnel, whose key features include:
• A lower level of risk transfer to underlying contractors, with cost risk shared between the TTT company and customers, as outturn costs are added to a Regulated Asset Base, the return of which appears in customer bills
• A cost of capital at 2.497%; a small premium over Government's cost of capital but which allows the introduction of private sector experience, management, cost controls and separation
• Levels of government support in areas such as liquidity, to help improve credit rating
• Pricing not completely fixed at the outset but reflects actual outcomes
• TTT is classified as off Government's balance sheet
This approach on new infrastructure has allowed TTT to achieve a cost of capital akin to regulated utilities, whose structure is already attractive to investors with long-term investment horizons, and therefore can attract low cost finance.
But in the case of both the utilities and the TTT model, those companies are still susceptible to the structural short-termism identified above. To make the radical change necessary to change the public's perception of private sector ownership, the models need to come hand in hand with completely revised governance that looks to demonstrate that companies will act in a long-term sustainable way.