Can we build it? Well, possibly...

It was always the economy we worried about, but unless we invest in the nation’s foundations, growth will grind to a crawl. Infrastructure investment can create jobs and impact instantly on productivity. But, asks James Ashton, where’s the money coming from?

Can we build it? Well, possibly...

Illustration by Vesa Sammalisto

Donald Trump might be cut from a different cloth to the career politicians he aims to upstage during his term in the White House, but there is at least one policy ambition that all of them have in common.

Infrastructure investment is held up as the solution to creating jobs, boosting the economy and lifting productivity. In explaining his vision for upgrading the United States’ creaking roads, bridges, tunnels and pipelines, Trump invoked former president Dwight Eisenhower, who championed the interstate highway system. The only challenge that remains is how to pay for all this. Matching public works with an injection of private money is not as easy as it looks, especially in the UK, which comes 24th in the World Economic Forum’s international infrastructure ranking.

Philip Hammond made a stab at correcting that in his Autumn Statement last year. Unveiling a National Productivity Investment Fund, the Chancellor committed an extra £23bn to housing, economic infrastructure and research and development from 2018 to 2022, when spending in this area will reach 1.7% of GDP overall.

“Raising productivity is essential for the high-wage, high-skill economy that will deliver higher living standards for working people,” Hammond said. Since he was fresh from approving a third runway at Heathrow, it’s a case of the government putting its money where its mouth is. Ringing in Hammond’s ears will be the words of his predecessor George Osborne, who declared “we are the builders” without calculating exactly how to get shovels in the ground.

The outlined state spending is a drop in the ocean on its own but is designed to encourage the private sector to join in. Even Trump will not be able to rebuild the US without investors’ help. Onshoring some of the $2trn of cash that American corporations including Apple, Google and Cisco have parked abroad will be a start. A one-off 10% repatriation tax – a discount to the existing 30% rate – gives the president $200bn to play with. But he can’t simply borrow more to reach his target of $1trn of infrastructure spending – and even that figure leaves him short of the $3.6trn of work the American Society of Civil Engineers estimates is required.

Most energy and utilities infrastructure spending over the next five years is privately funded

Despite the UK’s dismal ranking there appears to be plenty going on. The National Infrastructure and Construction Pipeline that details all such projects counts up £500bn of work in prospect – most of it in energy and transport – although two-fifths of that figure won’t be spent until after 2021.

This transparency is meant to foster certainty so that investors will step forward. In some sectors they already have. Chinese and French backers are behind the £18bn Hinkley Point nuclear plant in Somerset and most energy and utilities infrastructure spending over the next five years is privately funded. In waste and education, it is predominantly public cash. Occupying the middle ground, the Environment Agency’s £2.3bn, six-year flood defence programme stands out as a partnership funding model.

Here is another oddity: despite over £4.3trn of assets overseen in the UK, largely in the City of London, why do ministers need to cast the net so wide internationally to get work paid for? The government is trying to ease funding logjams with a UK Guarantees Scheme to help projects access finance. Since 2012 it has issued £1.8bn of guarantees supporting £4bn of capital investment – well short of the £40bn of guarantees that can be offered – and plans to keep the scheme open until at least 2026.

It is also mindful of the bigger picture. The National Infrastructure Commission was established as a permanent executive agency in January 2017 with the task of drawing up a National Infrastructure Assessment by 2018. Producing a vision of the country’s infrastructure needs to 2050 will be “an enormous piece of work”, the Commission’s interim chair Lord Adonis wrote last May. The Commission’s remit covers transport, energy, water and sewerage, flood defences, digital and communications and waste but not directly housing supply, schools, prisons or hospitals.

Infrastructure is a long-term game. Because any new asset is built to last decades, financial returns can be unpredictable unless they are pegged to a regulated pricing regime. Witness how most of the country’s water companies have been snapped up by overseas investors because they saw a steady, reliable income stretching out for years. But some building works – particularly the large-scale projects that promise to be transformational – can take decades to get going if they are subject to the whims of the planning regime, or struggle to win sufficient political or public support. Smaller schemes, such as road improvements, can be easier to fund and deliver an instant impact on productivity.

Crossrail’s funding model is unique, the private sector contributing a third of the budget through a 2% increase in London business rates

Lessons can be learned from Crossrail. The £15bn east-west rail link across London that opens in 2018 has won universal support because it will ease an obvious pinch point of congestion in the capital, as well as training the next generation of transport engineers. Its funding model is unique, with the private sector contributing about a third of the budget through a 2% increase in London business rates. “I can’t remember when I last heard a voice of protest from someone in London saying this was unfair,” Crossrail chairman Sir Terry Morgan said when I interviewed him a couple of years ago.

Yet Crossrail was for a long time languishing on the drawing board. Improving transport links between the two sides of the city featured in the 1940s Abercrombie Plan that led to the construction of new towns such as Stevenage. More recently, in 1974, a project christened ‘Crossrail’ featured in the London Rail Study produced by the Greater London Council and Department for the Environment. It eventually succeeded because it won cross-party and cross-city support – and the money was there, even though Osborne trimmed £1bn from the total when the coalition government took power. No wonder longterm infrastructure investment is also known as ‘patient capital’.

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