Screen shot 2013-02-05 at 15.41.46
Greg Clark is Financial Secretary to the Treasury and MP for Tunbridge Wells. Most Tuesdays he will be writing this new 'Letter from a Treasury Minister' for ConservativeHome readers. Follow
 Greg on Twitter.

Screen shot 2013-02-05 at 15.43.31From most parts of the Palace of Westminster you can’t
actually see the River Thames. But in the summer of 1858 you could have certainly
smelled it. The so-called Great Stink was so bad that Members of Parliament
were finally persuaded to do something about London’s need for a proper
sewerage system.

The great engineer, Sir Joseph Bazalgette was commissioned
to build the Thames embankments and the vast sewers that run beneath them. A
century-and-a-half later the embankments and the sewers are still serving us
well – thanks, in no small part, to Bazalgette’s foresight. Realising he only had
one chance to get things right, he worked out the sewer-pipe diameter required
for the demands of the time and then doubled it – an object lesson in the
benefits of long-term thinking.

For an object lesson in the disbenefits of short-term
thinking it’s hard to do better than the present-day banking crisis, itself
just one part of an even bigger debt crisis. Here we saw Bazalgette’s
principles thrown into reverse, the needs of the future disregarded in favour
of immediate gain.

In 2011, the Government asked Professor John Kay of the
London School of Economics to undertake a review of UK equity markets and
long-term decision making. His final report is available here
and the recent Government response here.

I’ll have more to say on issues like the City’s bonus
culture in future letters, but today I’d like to comment on something that
Professor Kay said about long-term thinking in relation to different subject:
infrastructure investment.

Looking back on Bazalgette’s achievements, Kay
wonders whether a scheme as visionary as the Thames Embankment would have had a
chance of going ahead in our own time
. For instance, one can easily imagine
that, in place of the can-do attitude of the Victorians, Bazalgette would have
faced one long planning inquiry after another.

But an even bigger obstacle, says Kay, would have been our
modern day accounting practices – which don’t fully capture the long-term
benefits of major infrastructure improvements. Part of the problem is that, obviously,
we can’t quantify the benefits that we’re unable to anticipate. For instance,
in Bazalgette’s day, medical science was not sufficiently advanced to
understand that cholera was caused by contaminated water – thus the public
health benefits of the sewers were not fully appreciated at the time. But even
if the future benefits had been understood, then the application of a standard
Treasury discount rate would have meant that the enormous value that the scheme
is still delivering today would have counted for very little when the decision
to go ahead was being made.

Of course, we mustn’t take the argument too far. The
Treasury’s cost-benefit analysis methodology provides a stern test for proposed
investments, which is exactly as it should be when taxpayers’ money is at risk.
Furthermore when it comes to controversial projects like HS2, it is vital that
the economic justification is established according to exacting standards – as
HS2 has been.

And yet, John Kay makes a powerful point. A rigorous
cost-benefit analysis is necessary part of the case for investment, but not the
only one. As important as the numbers are, there are other, more fundamental,
arguments. The Victorians, for instance, had to decide whether they wanted an
open sewer to flow through the heart of London, or whether they wanted to
bequeath something altogether better to future generations.

150 years on, we have some big decisions of our own to make.
Whether on high speed rail, new housing or energy infrastructure we have to
choose whether to stay stuck where we are or to move ahead.

Whether the issue is one of infrastructure investment,
deficit reduction or public sector reform, governments who dodge the big
questions don’t pay the price of a tough decision – but nor do they build the
future. I’m glad to be part of a Government that has chosen the harder path.