Chris Daniels is the Conservative Prospective Parliamentary Candidate for Stockton North.
Have you sat on the M1 in bumper-to-bumper traffic and thought “this road is not fit for purpose”? Have you stood all the way to Darlington on an East Coast Mainline service and wished there were more seats? Do you wonder why the debate over another airport runway in England has taken over 20 years to resolve?
Investing in major infrastructure projects requires imagination and a vision of the future. Imagine Sydney in the 1930s, during the depression. The Government and locals had been talking about a potential harbour crossing since 1815. Finally, as a result of a competitive auction, a “foreign” company, Dorman Long & Co Ltd of Middlesbrough, won the right to design and build their vision for the Sydney Harbour Bridge (and, yes, around three-quarters of the steel came from Redcar). At the time of construction it was the world’s tallest and widest bridge. It had eight lanes for traffic – but less than 10 per cent of the population owned a car. No-one could understand why it was so large and called it a “white elephant”.
It was, of course, an infrastructure vision. Fewer than 50 years later, the bridge was already over-capacity and work began on another crossing, this time a tunnel, to alleviate heavy traffic. Today, the Sydney Harbour Bridge is a lifeline and critical piece of infrastructure for all Sydneysiders.
So, what can we learn from our own experience and that of infrastructure visionaries of the past?
Infrastructure is fundamental to our standard of living and drives economic growth. It is an enabler of a country’s ability to remain competitive and productive. But infrastructure planning requires long-term vision. If we had a short-term horizon we might make no infrastructure investment decisions at all. Thankfully the Government has recognised the importance of infrastructure in their National Infrastructure Plan.
Of course not all infrastructure is immediately commercially viable. The public sector has an important role to play in supporting projects, at least until they are commercially viable – otherwise, they just won’t happen. And spending decades and decades worrying about the viability of a project risks capacity always being behind demand. If you look at population growth and forecast rail usage, the interesting question is not whether HS2 will be needed, but if it will be too little, too late. Sometimes a bold vision is required.
Getting Government’s role right in an area of large investment is critical. The National Infrastructure Plan identifies a pipeline of £466 billion of investment with a focus on energy and transportation. Some of these projects are already delivered by the private sector (with examples of investment both with and without Government support). However with well over £1,000 billion of Public Sector Net Debt, we must challenge ourselves to consider further ways to create and structure alternative sources of financing infrastructure spend, otherwise there may come a time where the drain on Government borrowing is just too high.
For example, Network Rail is essentially funded via around £35 billion of Government debt. In 15 years’ time it is expected to rise to over £100 billion. Network Rail is a regulated asset which could, theoretically, attract private capital. Could introducing private capital alongside Government on various parts of the business reduce dependence on Government borrowing, introduce alternative sources of funding and introduce some level of competition and benchmarking (in the same way that exists with water, electricity and gas)?
The presence of private sector capital in infrastructure investment is a win-win situation. In a low interest rate environment, pension managers are struggling to make decent returns for pensioners and are seeking investments to ensure their long-term liabilities are matched with long-term stable assets. Investing in infrastructure is a good way to achieve these objectives. Pension funds in Canada and Australia have around 10-15 per cent of their fund allocations directed towards infrastructure. In comparison, in the US and UK this is much lower (2 per cent on average across the UK).
The Pension Infrastructure Platform (PIP) has been initiated to support the objective of investing pension capital into infrastructure. However, the PIP doesn’t actually have that much money allocated from UK pension funds (especially relative to global pension funds invested in the space), nor do many UK pension funds invest directly in the infrastructure market. Added to which there are not enough short-term investable opportunities for private investors – so private capital has to look outside the UK to invest.
The challenge is to get the balance right. This involves:
- Ensuring the Government is bold with its role in strategic planning for major projects;
- ensuring Government supports project viability so critical investment is made in infrastructure – in some instances where it is not necessarily commercially viable in the short-term;
- providing thought leadership and the vision for the future – including from international best practice;
- considering structures to facilitate investment by pension fund capital and reducing Government’s reliance on further debt in circumstances where alternative sources of funding exist;
- working with the private sector in a transparent environment, introducing more benchmarking and competition across the infrastructure space to ensure efficiency gains and a “best in class” approach;
- providing further transparency of the cost of build, cost to the end consumer and use of taxpayers’ funds;
- and, importantly, recycling Government capital in infrastructure projects once they are profitable in order to allow further new or marginal projects where Government support should be provided.
The focus on infrastructure is absolutely right, but we can do more to utilise the skills, experience and funding available in the private sector. This will ensure Government focuses on what it should rather than getting distracted by aspects of infrastructure that it has no need to control.