Britain | Capital spending

Weapons of mass construction

A shopping list of infrastructure projects is not enough to rescue the economy

GIANT steel columns are being drilled 16 metres into the earth at Royal Oak in west London, preparing the way for twin 6.2 metre wide tunnels to be carved underground. By 2018 this muddy patch will host Crossrail, a new east-west commuter service which will bring another 1.5m people within 45 minutes of central London.

At a cost of £14.5 billion ($22.5 billion) the biggest engineering project in Europe is just one of 40 programmes labelled “nationally significant” by the British government on November 29th. The National Infrastructure Plan also lists 500 further proposals from the private and public sector, estimated at £250 billion-worth of work in total, “to 2015 and beyond”. In the next three years the government will pay an extra £5 billion towards these projects. It wants British pension funds and other institutional investors to stump up a further £20 billion (see Buttonwood) and aims to attract foreign cash.

The coalition hopes that such projects will get the country moving in several ways. Improving Britain's railways, power stations, roads and internet access could provide a short-term economic boost and also increase longer-run productivity. With a good scheme everyone wins, says Paul Johnson of the Institute for Fiscal Studies: “You get more economic bang for your buck” than with other types of stimulus. But it will take a lot to turn a £250 billion wish-list into concrete and steel.

Britain certainly needs better networks. Trains are crammed at peak hours and investment has lagged behind a big rise in passengers. Heathrow, the country's hub airport, is more congested than its four main European rivals; road building has stalled and broadband is too slow. The neglect is most extreme in energy, where chronic underinvestment is now twinned with another pricey imperative: tackling climate change. A quarter of all current generating capacity is due to be retired within a decade. But in Britain's liberalised market, companies have preferred to work their existing assets harder, rather than invest in new, cleaner sources of power.

Big and often wasteful spenders such as Japan and Spain have greatly trimmed back their investments in infrastructure in recent years. But Britain still invests less as a proportion of GDP than many other rich countries, according to the OECD, a think-tank. And that proportion has fallen. A recent report by the World Economic Forum ranked the country's infrastructure 28th in the world, behind Malaysia and Bahrain. It has slipped four places since the same survey in 2008-09.

That's bad for the economy. Sir Rod Eddington, a former boss of British Airways, argued in a 2006 review that rising congestion in England alone would cost the equivalent of £25 billion by 2025 if networks did not keep up with demand. It may also hazard future growth. Few firms choose to locate in Britain because of its infrastructure, says the CBI, a business lobby. It fears that further decay might push firms overseas.

But making Britain whizz again will cost more than the infrastructure plan predicts. Ofgem, the energy regulator, reckons £200 billion needs to be spent by 2020 in that sector alone. Dieter Helm of Oxford University puts the bill for renewing all of Britain's systems at £500 billion.

And these projects soak up cash years before they offer any return. Most last longer than any government, reducing their appeal to politicians. That also puts off private investors, who fear that future administrations may renege on promises and damage their return. Recent events support such concerns: Britain and Spain have both cut subsidies for some renewable generation, for example.

Since the competition for infrastructure investment is global, not national, Britain faces a further problem: project costs are “excessively high”, according to Infrastructure UK, a Treasury body charged with helping the private sector invest. That is partly because regulation tends to be rigorous and planning onerous. But Infrastructure UK reckons stop-start investment and poor commissioning are also to blame. It hopes that laying a pipeline of projects now will help to cut costs by £2 billion to £3 billion a year.

The government's new plan is designed to get investment back on track. The list holds few surprises. Many projects are ongoing, such as Crossrail and some road improvements. Others are far off: bidding has not yet started for rural mobile-phone coverage, for example. The most significant policy signal is to encourage new toll roads and bridges. Plans to ease congestion on the A14 may be financed this way; the Treasury hints that tolls may be permitted on a new bridge over the River Thames.

Many of the ideas are sensible: planning road projects as a programme, rather than on a case-by-case basis, for example, and trying to speed up planning and make it more flexible. In other spheres the document is irrelevant. Mobilising private sector funds in the energy sector, for example, depends on electricity-market reforms that have no clear timetable.

Dig for victory

Infrastructure only matters if it serves other industries or consumers. Often, the most cost-effective work is incremental and seemingly mundane, such as introducing variable speed limits on motorways or improving electricity transmission lines. Supposedly transformational projects such as building a high-speed rail link north from London are glamorous, but the expense may outweigh the benefits. The government needs to make its priorities explicit. It is not clear what it means to be part of the favoured 40, beyond a wishy-washy assurance to “help resolve barriers holding back important projects”.

This is not so much a plan, then, as a shopping list of projects. In fact, that is precisely its point. Since the government is committed to slashing the deficit, it expects the private sector to finance almost two-thirds of projects to 2015. As the euro zone burns, Britain seems a safe haven for investment. The government wants to capitalise on this by presenting spending on the country's communications and energy systems as another safe bet.

The marketing exercise is partly intended to attract pension-fund money. This seems like a good idea: such funds need long-term, low-risk investments with reliable returns, which infrastructure projects could theoretically provide. Two groups of pension funds have signed a “memorandum of understanding” to this effect. That is a long way from parting with any cash, although a Treasury official says these groups are “gung-ho” about it.

It will be a big step if the government can indeed double the 2.5% of British pension-fund assets already invested in such schemes. But other ways to finance projects and encourage local and foreign funds also need to be sharpened up. In 1992 the Conservative government created a device to raise money off-balance-sheet, known as the private-finance initiative (PFI). This has been criticised at home for its expense and inflexibility, but has been replicated across the world. When Labour launched hundreds of such schemes during its three terms in office, the Tories turned against PFI. On December 1st the government was due to launch a call for evidence on how to reform it. The Infrastructure Plan also suggests local authorities could be given more flexibility to borrow against future tax revenues. That is a good principle, but details remain vague.

Other, non-fiscal, measures would also help. The government often gets too involved in the nitty-gritty: it comes close to setting railway timetables, for example. That is time-consuming and costly. It could consider lengthening rail and airport franchise terms so that pay-back periods are longer and big investments feasible.

Innovation in infrastructure was once one of Britain's strengths. The Victorians invented the railway and exported it to the rest of the world; London still flushes its waste into a 150-year-old sewerage system. The long lifespan of these schemes shows the benefits of good investment. The current government presides over a listless economy and rising jobless numbers. It has to start somewhere; infrastructure is a good place. Despite the fanfare with which this plan was launched, it alone will not dig Britain out of its hole.

This article appeared in the Britain section of the print edition under the headline "Weapons of mass construction"

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