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Martin Chambers: Loan guarantees misguided

25 October 2012

Encouraging companies and individuals to invest money in building and construction is what everyone agrees is needed to simulate growth, so why am I not delighted to hear that Crossrail’s £1bn rolling stock programme will be the first beneficiary of the government’s £40bn loan guarantee scheme? Surely this is just what we need to support much-needed investment in infrastructure?

First, the money is for the rolling stock, not the fixed or hard infrastructure and that’s where it all starts to go wrong for me. Why is the government providing a guarantee for something that is a no brainer! Hard infrastructure, all £16bn of it, is currently being built. Does anyone out there consider that there won’t be an absolute need for the rolling stock? I suspect not, so it’s plain barmy to think this requirement may not be required – where is the risk that leads to this project needing a guarantee?

This procurement does not need a government guarantee. What it actually needs is an effective and equitable contract arrangement, an approach to procurement that gives certainty to the market about the end user requirements and how we (Crossrail users and taxpayers in general) will pay for them.

These are the same principles that have to be applied to any procurement, even those involving the now much maligned PFI system that delivered many major hospitals and prisons. Under PFI Mk 1 (we are still waiting to hear what the government thinks the new improved Mk 2 version will look like) the procurement route included the knowledge that when completed, these new facilities would have patients and prisoners and hence a revenue stream.

Major procurements are often complex, just look at what happened to the West Coast Main Line deal, the whole process is to be re-run because of mistakes in the procurement process. So, yes care is needed in their execution but not a payment guarantee!

To me the current philosophy behind the government’s guarantee scheme is flawed and will fail to create genuine growth if they continue to invest in headline-grabbing major projects that are robust, justifiable and clearly needed.

What we really need is for the government guarantees to be provided to a much broader portfolio of less certain projects that would not otherwise go ahead, which will then free up blocked projects and release them out into the market place, creating jobs and wealth.

Large projects and infrastructure investments that have a sound business case do not need government guarantees but the procurement processes and tools, whether these are PFI, PPP or any other, should be re-assessed to strip out waste and ambiguity.

Ambiguity creates potential for different interpretations and it seems that this is what may have happened with the West Coast Main Line deal. It really doesn’t matter what the form of contracting arrangement is, what needs to be in place is a process that is carefully structured and provides absolute clarity of the requirement, risk apportionment and the reward arrangements. These all have to be placed beyond “local” interpretation.

As an industry we are constantly challenged to demonstrate that we are achieving “fit for purpose” and “right first time” solutions. I think that we should take the government procurers to task on these same fronts and they should be judged by the same standards they demand of industry.

 

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