February 1, 2013 7:42 pm

Britain in knots over infrastructure

Big projects need clear plans and honesty about who pays, writes Dieter Helm
J. Mchugh illustration©J. Mchugh

The government’s decision to push ahead with HS2 is a good one. Britain needs to build a high-speed rail system just as it needs to build a smart energy system, a high-speed broadband system and a water, sewerage and flood-defence system. It needs to address its chronic airport capacity problems in the southeast, to address road congestion and to tackle the state of our natural capital. As almost everyone agrees, there is no lack of things to do. It is doing them that is the problem.

As revealed by the great debate between growth advocates and those living on the route of the planned rail service linking a London-to-Birmingham line with Manchester and Leeds, Britain has a long way to go before it can deliver anything resembling a modern and efficient infrastructure – and hence the ability to compete on the global stage. Instead we have muddle (roads), confusion (airports), delays (energy) and high costs (energy again).

It is not for want of trying. The coalition government has published a national infrastructure plan, launched a reform of the planning laws and attempted to tap pension funds and other potential investors.

Having an infrastructure “plan” is a good idea. Only government can decide what sort of infrastructure systems Britain needs. Markets will not produce HS2 or new power transmission systems and they will not create a resilient water and sewerage system. But the latest national infrastructure plan, published in December, does not reveal such system planning. It is just a wish list of individual projects, including the widening of a Cambridgeshire A-road.

Even if the government had a proper plan, this would not resolve the inevitable tensions and trade-offs in a small, crowded island with a rising population. As HS2 shows, new infrastructure creates losers and almost always results in environmental damage. Yet if a project is worth doing, the gains must outweigh the losses. Dealing with our planning problems is not just about speedier procedure. Rather it requires paying for damage to property and making sure environmental damage is minimised and then offset. Winners should not only be able to compensate the losers, they should actually do so.

With our adversarial, winner-takes-all planning system, it is little wonder UK infrastructure is notorious for the time it takes. HS2 looks like a record – two decades to build a railway that in China might take a little over two years to complete. It joins a sad list of marathons – Heathrow’s Terminal 5, various nuclear power stations and the Newbury bypass. Lawyers grow rich, non-government organisations force delays and protesters capture the headlines.

The “no net losers” principle would transform planning. Deciding to go ahead with a project should mean there are environmental improvements elsewhere that are at least as good. The protesters will probably not go away but the sting can be taken out of development.

When it comes to finance, UK infrastructure is in a league of its own. The fundamental flaw lies in the fact that the Treasury has long been fixated on keeping the borrowing off government books so that the deficit does not look so bad. The lack of an infrastructure balance sheet – and an ability to set assets against liabilities – is the root cause.

It was this accounting concern that first drove privatisation. Customers would pay (eventually) for new projects and investors would be protected by the duty on regulators to ensure the privatised companies could finance their functions. There followed the public finance initiative and public-private partnerships. Treasury accounting rules again drove these schemes, promising future taxpayers would pay.

As long as customers and taxpayers could, in fact, pay, these mechanisms did facilitate investment – often at an inflated price. But what happens when they cannot pay? HS2 is one example, but increasingly this is also likely to be true for energy customers – where perhaps a quarter of households are already likely to be “fuel poor” within a couple of years – who will be faced with further costs from renewables and nuclear. Add up the claims on future customers’ incomes from each of the infrastructure industries, then throw in a return to normal interest rates – say, 2 per cent above inflation – and hence higher mortgage costs, and the conclusion any lender should come to is that, in aggregate, the lending is not founded on a secure revenue base. Can’t pay might mean won’t pay, which would mean debt might not be serviced or repaid. Spanish investors in renewables have already found out the hard way – but this is just the beginning.

No amount of trips to China to ask lenders to cough up will solve this. Lenders are not the problem; it is the revenue streams. Here the government is the only backstop – as it has begun to realise. HS2 is a public project, which will eventually be privatised at a loss. HS1 – the high-speed train line between London and the Channel tunnel – was forced into a similar position. Government supports Network Rail. Broadband needs subsidies, and the government is now subsidising some water customers in the southwest. Nuclear may have to follow.

If customers are not going to pay, taxpayers must. The trouble is that these are largely the same people – and this means something altogether more politically difficult. One way or another, spending must be cut elsewhere to fund the necessary investment. By failing to maintain our infrastructure, we have in effect been living beyond our means. The alternative – signing expensive investment agreements with pension funds and sovereign wealth funds – comes at a price politicians are reluctant to pay: telling the public the true cost it will bear.

Delivering infrastructure at scale, on time and on budget is not rocket science. The Olympics showed the way to do it: there was a hard deadline, few losers and government money. What is needed is a set of clear system plans, planning procedures that compensate losers, and brutal honesty about what it is going to cost and who is going to pay. We must stop fretting about government accounting rules and tinkering with project lists and get on with it. Otherwise we will be left on the international sidelines.

The writer is fellow in economics at New College, Oxford

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