We can all no doubt think of an infrastructure project the government could spend a few billion on. Personally, I’d like a high-speed rail line from the Weald of Kent straight into central London, with subsidised fares and built entirely underground, so that it didn’t spoil the view from my house. Another terminal at Gatwick might be handy – so long as the flights are directed away from my village. And one of those tidal power generation schemes in the Thames estuary to provide the whole of the southeast with free electricity would be nice.
By the time we’ve compiled our lists, the £30bn that the chancellor, George Osborne, earmarked in his Autumn Statement for new infrastructure will be spent by lunchtime. Probably several times over. Whether any of it does the economy much good is debatable. But it might save the City.
Keynesians love to argue for big government building projects as a way of getting everything moving again in the midst of a recession. What they usually forget is that the money spent gets taken out of the economy somewhere else, where it might have been deployed more usefully. They also exaggerate the numbers of jobs that will be created. A few tens of thousand construction jobs – many of which will go to east European immigrants anyway – won’t make much of a dent in an unemployment total of more than two million.
So in the scheme unveiled this week, the Treasury wants pension funds and other investors to put their money directly into infrastructure projects. That could come at precisely the right moment. The financial markets are shrinking rapidly. Lay-offs are rife throughout the City. UBS announced plans to reduce staff in its investment banking unit from 18,000 to 16,000. The stockbroker Evolution announced it was laying offstaff last month. BNP Paribas, Merrill Lynch and Nomura have all said they are cutting back on employees, with many of the redundancies in the UK. Altium said it would close its stockbroking division. There is no great surprise in any of that. We have moved from an era of massive debt creation into a period of deleveraging. You would expect the companies that basically created debt to get smaller, just as you would expect the tobacco companies to get smaller when everyone is giving up smoking.
The City needs to find new lines of business. Infrastructure could be one of them. After all, the original purpose of the capital markets was to fund precisely that kind of work. When railways were created, they needed such vast sums of money to build that a stockmarket was the only way to assemble the necessary cash. In the 1840s, huge numbers of railway companies were listed, mainly on the newly created regional exchanges. On the Liverpool stock exchange in the 1840s alone, more than 300 railway companies were floated in less than a decade.
Railways not only required huge sums of money, but they paid a return on the investment over many years – much like today’s infrastructure projects. But that is precisely the kind of money that pension funds and other institutional investors are good at providing. There are not many other opportunities out there. Most of the growing industries are in new technology, or in business services, where you don’t need much capital. Websites can be set up for virtually nothing. The entrepreneurs behind them can raise money themselves without the hassle of dealing with outside shareholders. Small firms can increasingly rely on the new breed of web-based peer-to-peer lenders who can provide them with working capital without charging the huge fees the City expects. As for mergers and acquisitions work, or for creating complex new derivatives, there is about as much demand for those as there is for Greek government bonds.
But the world does need new infrastructure. It always needs new roads, new transport systems, and, increasingly, it is going to need alternative energy sources such as wind, tidal and solar power. All of them are going to require huge sums of capital. It won’t come from cash-strapped governments – instead, it will have to come from the private sector.
At the same time, it should be a good deal for the pension funds. They need somewhere to put their money where it can earn a return over 30 to 40 years. Most sovereign bonds look very risky right now – they are either bust, like most of the eurozone, or paying out yields that are negative in real terms, like America and Britain. Equities don’t look like a much better bet. Dividends might be attractive, but you need to be a giddy optimist to believe that the never-ending crisis in the eurozone is not going to hit them hard over the next couple of years.
Investment in infrastructure looks a far better alternative. But it’s important not to be greedy. The Private Finance Initiative, pushed so hard by Gordon Brown, turned into a way of fleecing the taxpayer. It is more important to structure vehicles that build useful things and provide a respectable but fair return to the investors. If the banks and pension funds can find a way of doing that, they might create a whole new business, and save themselves from what looks like rapid decline.