Good Growth Requires Getting Public-Private Partnerships Right

Dec 28 , 2024
By Mariana Mazzucato

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The United Kingdom's (UK) Labour government has given serious thought to the public investment needed to get the economy back on track after 14 years of austerity, neglect of social infrastructure, and capital flight triggered by Brexit and uncertain economic conditions. It understands that the situation demands a new strategy to tackle big problems like child poverty, health inequities, a weak industrial base, and struggling public infrastructure.

What should this look like?

The UK Department for Business & Trade's recent industrial strategy "green paper," Invest 2035, is a promising start. However, an industrial strategy should be oriented around key "missions" like achieving net-zero emissions, rather than around specific sectors, as the government appears to be doing. While the government has set itself five "missions," they seem more like goals with some targets, rather than central to how government and industry work together.

For Labour to deliver on its agenda, it should get its public-private partnerships right. Historically, public-private collaborations in the UK have involved the state overpaying and the private sector underdelivering. Following the Brexit referendum, for example, the government secretly gave Nissan 76 million dollars to build new cars in the UK. But, Nissan still abandoned a planned expansion at its Sunderland plant, and the promised jobs never materialised.

Likewise, under the failed "private finance initiative" schemes of the 1990s, the state would pay inflated sums to private contractors to operate public services such as prisons, schools, and hospitals before handing them back to the state, often in poor condition and without any clear improvement to the service. This approach was widely used in the construction of National Health Service hospitals, with the first 15 contracts generating 45 million pounds in fees – some four percent of the capital value of the deals – for advisers across the public and private sectors.

A UK Treasury analysis later showed that the general costs of PFIs were double that of government borrowing.

Fortunately, many public-private partnerships globally have produced more positive results. Germany's national development bank, KfW, offers low-interest loans to companies that agree to decarbonise. The French government's COVID-19 bailout of Air France was conditional on the carrier curbing emissions per passenger and reducing domestic flights; by contrast, the UK bailed out easyJet with no strings attached.

In the United States, the CHIPS & Science Act requires companies that receive public funds to commit to climate and workforce development plans, provide childcare, and pay a living wage. Preference is also given to companies that reinvest profits instead of using share buybacks.

The UK does have some experience in shaping markets around clear goals. In developing the Oxford/AstraZeneca COVID-19 vaccine, the government used a risk- and reward-sharing model in which it provided 95pc of the funding in exchange for certain commitments from the company. AstraZeneca would provide the first 100 million doses to the UK and allow the government to donate and reassign surplus vaccines. Octopus Energy's acquisition of energy supplier Bulb allowed the UK government to reap 1.5 billion pounds in profit as Octopus repaid the public support it had received through an earlier profit-sharing deal.

This agreement safeguarded jobs and prevented consumers from incurring any extra costs.

With a mission-oriented strategy, the Labour government could scale up and systematise this type of public-private engagement. Rather than being "unreservedly pro-business," as it claims to be in its green paper, it should ensure that public investment targets clear objectives: to crowd in private capital, create new markets, and increase long-term competitiveness.

Consider the UK's net-zero-emissions target, which is not only about clean power but also about how we eat, move, and build. The state has a crucial role to play as a first-mover, shaping markets so that private incentives are aligned with public goals. Yet, judged by this standard, recent moves by the Labour government appear to fall short.

For example, Prime Minister Keir Starmer's deals with Macquarie (an investment bank), Blackstone (asset management), and others raised more than 60 million pounds without setting clear, outcomes-oriented expectations or ensuring that risks and rewards are shared. Equally, the government's support of carbon capture and storage (to the tune of 22 million pounds so far) allows funds to flow to incumbent oil giants without holding them accountable in the green transition.

These deals are structured to achieve growth at any cost, when the UK needs is a growth that is inclusive and sustainable. That requires better corporate governance to prevent situations like Thames Water (a water and waste utility) being saddled with over two billion dollars in debt after Macquarie became a major shareholder in 2006.

Growth itself is not a mission; it is the result of public and private investment, and good growth is a result of directed investment. If the UK's climate transition is going to deliver for people and the planet over the long term, the government's engagement with the private sector should reflect confidence, not capitulation. This can start by deploying tools that the government already has. The new National Wealth Fund and Great British Energy (a publicly owned clean-energy company expected to launch early next year) could make a huge difference, but only if policymakers get the implementation right.

For example, the National Wealth Fund should introduce conditionalities for public investments; provide public access to intellectual property and patents for research; create subsidies and other incentives for mission-aligned investments; and use loan guarantees and bailouts to move companies toward decarbonisation, improved working conditions, and fewer share buybacks. Procurement is also a strong lever, because it represents one-third of the government's total spending and can direct investment toward strategically important goals.

Ultimately, the UK government should shift from a sectoral approach to a mission-oriented one that embraces a confident, outcomes-oriented form of public-private partnership, incentivising the private sector to do its part. Labour understands the problem, but its proposed solution still needs some work.

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PUBLISHED ON Dec 28,2024 [ VOL 25 , NO 1287]

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