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Rachel Reeves is considering seeking private finance to pay for a £9bn highway and tunnel across the river Thames to the east of London in an effort to keep the costs off the government’s books.
Investors in the Lower Thames Crossing would receive returns from the toll road in exchange for bankrolling the project, potentially on indefinite or 125-year contracts, according to two people close to the Treasury discussions.
The Treasury insisted the chancellor would not return to old-style “private finance initiative” contracts, used on a large scale by the last Labour government and axed in 2018 because they represented poor value for money.
But a spokesperson said the government was committed to “harnessing private investment” and working in “partnership with the private sector to deliver on its missions”.
The LTC plan comes as part of a wider attempt by the new Labour government to draw private finance to road, energy and water projects, with Reeves in Canada last week to court international pension funds.
Labour has vowed to unleash a building boom to upgrade the UK’s decaying infrastructure and housing, but Reeves has set herself tight debt rules that constrain her ability to spend government money.
The chancellor has discussed using a new form of private finance initiative to deliver infrastructure while keeping debts off the government’s balance sheet, the people said.
This could be closer to the regulated asset-based model used on water projects such as the Thames Tideway, a new sewer under London, they said.
Unlike traditional PFI contracts, where investors received guaranteed payments from taxpayers, London residents will pay for the Tideway through additional user charges in water bills.
Reeves’s approach could include capped returns for investors or close scrutiny by an independent regulator, the people added.
The LTC’s £9bn price tag means the project could still require the government to underwrite the construction risks on the tunnel to make it attractive to investors.
“Given these costs, the project may require substantial government funding to substantially ‘de-risk’ the project for private investors,” said Alistair Watson, partner at law firm Taylor Wessing.
The UK government stopped using PFI deals in 2018 when then-Conservative chancellor Philip Hammond ended the decades-long practice that began in 1992 under Tory premier Sir John Major.
The National Audit Office has said PFI provided poor value for money compared with the Treasury paying for projects directly.
The 14-mile Lower Thames Crossing, which would connect Kent and Essex, has not yet been approved. A decision on whether to go ahead was delayed ahead of the July 4 election and is now expected in October.
The cost of the LTC, which would be the first wholly-new crossing across the river Thames to the east of London in 60 years, has already risen from between £5.3bn and £6.8bn when it was first agreed in 2017 to a current forecast of £9bn.
About £800mn has been spent so far and there have been 359,000 pages of planning applications. If consent is given this year, construction would start in two years, ahead of a planned opening by 2032.
Reeves last month cancelled a series of infrastructure projects citing spending pressures, including a £1.7bn tunnel near Stonehenge, but made no mention of the LTC at the time.
The LTC is now subject, along with other road projects, to the government’s multiyear spending review and could still be cancelled.
Road tolls have proved controversial in the UK, and at times unprofitable for investors, even though they are widely used in France and Germany.
The M6 toll road, a 27-mile stretch of motorway that was designed to ease congestion on the main carriageways of the motorway in the West Midlands, made losses for several years for its former owners, which included the Australian investment bank Macquarie.
The LTC is intended to relieve pressure on the east Thames crossing at Dartford, which was privately financed and also charges tolls.
Tony Travers, professor at the London School of Economics, said shifting road projects on to the private sector would be appealing in wealthy areas such as London, where usage is expected to be high.
“It’s a new project so people can’t complain they are paying for something they have previously had for free,” Travers said.
But a change in funding structure risked further delaying the project, which could add to the costs, he added.