A ‘massive’ change of mood?

In the latest exam of Britain’s economy, Christine Lagarde, head of the International Monetary Fund (IMF), praised the UK’s efforts to reduce the deficit, but called on the government to make greater efforts to stimulate recovery.

So it was no surprise to see Deputy Prime Minister Nick Clegg, like an eager schoolboy, almost falling over himself to win Lagarde’s approval with his announcement on infrastructure in the Financial Times the following morning.

Unlike the rhetoric of the past, Clegg did not talk much about bringing in new private investors, or harnessing pension funds to inject funds into the infrastructure arena. Instead, he talked up the UK’s creditworthiness and the strong balance sheet of the Treasury following the deficit reduction plan.

While this could be taken as the government planning a major round of direct investment in new roads, rail, schools and other buildings, it seems more probable that the deputy prime minister expects the Treasury to be supporting projects, possibly by providing state-backed guarantees – something Prime Minister David Cameron has already referred to.

So although some took Clegg’s speech to be a rejection of PFI and the use of private finance in public infrastructure, it needn’t be seen that way. Rather, it seems that the government may have come to the conclusion that, to get the kind of investors and size of cash into the market, they are going to have to offer some sort of promise to the market.

In terms of the PFI debate, this could have significant implications for the ongoing review of the model. In the past, Infrastructure UK chief executive Geoffrey Spence has insisted the Treasury will not give guarantees on the refinancing of projects – something which has proved to be a sticking point for institutional investors who do not want to get involved in the construction phase.

But Clegg’s comments could signal a change of mood here, and the IMF’s insistence that the UK needs to start delivering economic growth could have forced the Treasury’s hand. State-backed guarantees around refinancing in PFI deals would certainly take away some of the biggest stumbling blocks to bringing pension funds and insurance firms into the market.

Unfortunately, though, there is not a lot of hope in the market that Clegg’s latest comments will turn into anything concrete. At almost every major step in this government’s financial journey – from the Comprehensive Spending Review through to this year’s Budget – ministers have been eager to pledge their commitment to infrastructure.

But at no time after these grand announcements have we seen any substantial action to back up the rhetoric.

The feeling is growing that Clegg’s “massive” infrastructure push is nothing more than an attempt to please the IMF, at least for another year.