Our transport, energy and communications networks need updating. And that provides just the kind of long-term investment opportunities the economy needs, says Simon Wilson.
What’s the state of Britain’s infrastructure?
Poor, say British businesses. Half believe that the country’s transport network has deteriorated in the past five years, and 58% believe that Britain’s infrastructure is worse than that of its European rivals. That’s according to a recent survey carried out by accountants KPMG for the Confederation of British Industry (CBI). This creaking infrastructure is “stifling growth” because it puts businesses off investing here, says CBI dirfector-general John Cridland. The Institution of Civil Engineers came to a similar conclusion in a report published last year. And the latest survey from the World Economic Forum ranks Britain 33rd for its quality of infrastructure. That puts us alongside Slovenia but behind Tunisia and Cyprus – and far behind Japan (17th), Germany (sixth) and France (fifth).
So what does Britain need to do?
Spend more, and spend it more cost-effectively. Britain’s first National Infrastructure Plan, published a year ago by the Treasury, says that £200bn is required to upgrade Britain’s transport, energy and communications networks over the next five years. The revised version, announced by chancellor George Osborne in his autumn statement a fortnight ago, set out a clear pipeline of some 500 projects worth £250bn. These span road, rail, energy, telecoms, flood defences and waste – including some 40 major infrastructure projects deemed to be of “national significance” over the next decade and beyond. As for cost-effectiveness, the scale of the challenge is just as big: major civil engineering projects cost 60% more in Britain than in Germany.
Can we afford all that?
Nobel economics laureate Joseph Stiglitz has argued that if the government borrows at today’s rock-bottom interest rates and invests the money in profitable capital projects that pay a higher rate of return than the cost of finance, then those costs pay for themselves in the long run. But that said, there’s no denying that raising these kinds of sums is a huge challenge in the current economic climate. That’s why the government is looking for sovereign wealth funds and pension funds to up their involvement.
Any takers?
China, for one. Lou Jiwei, chairman and chief executive of China Investment Corporation, Beijing’s sovereign wealth fund, recently visited London to discuss investing in UK infrastructure. China is already a big investor in Britain: equity analysts say investments by China’s State Administration of Foreign Exchange, which manages the bulk of Beijing’s $3.2trn reserves, now account for some 3% of the combined market cap of the FTSE 100. But in an opinion piece for the FT, Lou made it clear that Beijing wants to become more hands-on.
What did he have to say?
He agrees that investing in infrastructure will be crucial to future growth in developed economies, such as Britain, and that China is “keen to get involved”. As such, China Investment Corporation “is now keen to team up with fund managers or participate in public-private partnerships in the UK infrastructure sector as an equity investor”. Lord James Sassoon, the Treasury’s commercial secretary (and de-facto minister for infrastructure), toured the Gulf states last month and claimed to have seen a “huge appetite” there for such investment.
What about pension funds?
As with sovereign wealth funds, it’s still early days. The government has signed a “memorandum of understanding” with the National Association of Pension Funds (whose members manage £800bn of assets) and the Pension Protection Fund to “establish a platform” for boosting pension fund investment in infrastructure from its current low level of just 2.5% of assets.
Even if the path forward remains fuzzy, the wooing of private investors is certainly timely. A range of infrastructure projects, including the high-speed rail line linking London with the north of England, is planned just as investors are looking for a wider range of long-term investment opportunities. Infrastructure is perceived to offer higher returns than government bonds, but with less risk and more stability than equities.
But the British Treasury’s poor track record in this area means that investors should “proceed with caution”, reckons the FT’s Lex column. The private finance initiative, Labour’s big idea for keeping debt off the national balance sheet, was undone by its complexity. But provided the process is transparent, and infrastructure debt offers minimal risk with a higher yield than 30-year gilt, then “funds will bite”.
Parasites on the past
Recent generations have lived – “almost without conscience” – off the infrastructure investments made by previous generations, writes Antony Oliver in a recent editorial in New Civil Engineer magazine. The evidence includes Bazalgette’s now overflowing Victorian sewers in London; the over-stretched and creaking Victorian rail network; the leaking water networks; the outdated and inefficient power stations; the clogged motorways. In recent decades, we have failed to take responsibility for upgrading these kinds of social necessities, but a crisis point is approaching. “Investing in decent modern infrastructure is vital if our children are to avoid being saddled not only with the debts of the generation before, but also with the repair bill.”