Design, Build Finance and Operate schemes ( PFI in nature) meant that the public sector was a knocking bet for profit loaded financial investment vehicles – not to the benefit of the public purse but to the oligarchy finance market.
However NLGN is right in moving away from navel gazing about where it all went wrong and suggesting alternatives. Many years ago in UNISON North West region I was privileged to speak with Alan Simpson on the issue of PFI and he provided an excellent analysis of the use of public bond issues to finance public sector capital investment – this was well supported within UNISON as moves against PFI began in earnest with the dawning realisation that this method of funding would cost the public purse dearly.
Public bond issues can provide for an ethical investment and low risk solution to levering in capital whilst ensuring a return to the paying punter. It is an ideal choice for pensions fund – both public and private - as the returns on investment can be relatively speaking ‘guaranteed’ in an uncertain financial climate. Whilst public sector bonds are unlikely to ever represent the bulk of investment choices at least as a part of a diverse investment port-folio they could provide certainty of returns in very uncertain times. Brown and Darling in fact increased public bonds issues at the start of the current financial climate to raise much needed funds.
The critical issue now for the public sector is that many large scale capital investment projects are suffering not so much from short term finance gaps but gaping chasms, as the private markets simply do not have the spare cash to invest. This is already impacting on regeneration , housing and transport investments, which in turn has a detrimental effect on local economies. It should be noted that sub-regional economies outside of London can ill-afford to lose public sector investment – they are already recovering at a slower rate than London and the South East and once again marked differences in unemployment rates are raising the spectre of the two tier Britain of Thatcher with very distinct north south divides.
So where can investment realistic come from? The answer may well lie within public sector pension funds but with a catch. The vagaries of the market place and the failed investment strategies of some funds have led to attacks that the local government pension schemes is unaffordable. We can certainly sugar the public sector pension cost pill by utilising funds for guaranteed returns for public sector investment projects. I see this as a win win situation. Few within the public sector want to see their hard earned pension cash going into companies such as British American Tobacco or arms companies but the reality of the funds is that Trustees are required by pension law to seek the best possible rate of return. Blue chip investments, albeit in many cases amoral, often provide the rapid returns current regulations demand of the funds. Many future and existing pensioners would instead like to see their funds invested in local schemes and initiatives with guaranteed rates of return. However for this strategy to have any effect Government must act quickly to amend the rules surrounding pensions fund actuarial evaluations. Currently funds have to show returns on a short term basis typically one to three years to ensure that they are able to demonstrate, on an actuarial assessment, that they are ‘liquid’ enough to meet pension demands.
This whole process is skewed by a set of assumptions about likely calls on the funds leading to short-term goals for investment returns. If longer terms calculations of the funds actuarial valuations were to be allowed then the prospect of public sector funds helping to support public sector investment schemes, with profits returned to the public sector pension funds, we can begin to square the investment circle. Moreover the pensions funds need not be a passive investor.
Investor activism on the part of the pensions funds could ensure guaranteed use of community benefits in the investment such as apprenticeship training, skills development, green technologies and local environmental sustainability. This makes the schemes more attractive all-round whilst providing the financial returns that the funds need to stay in financial kilter. So a brave mix of public sector bond issues and amendments to the investment and actuarial valuation rules on public sector pensions could provide a true alternative to the drought on public sector investment. If Brown has shown his Keynesian credentials in ploughing money into the economy to avert the worst excesses of recession then a brave new world of recycling public sector funds to the benefit of society could await.
Anna Rose
