To promote and support infrastructure, policymakers need to set up a framework that allows the public and private sectors to work together on big projects © Paul Waite
This article is the second part of our special report on infrastructure. Click here to read the first article in the series, “the money’s not the problem.” Click here to read the third article in the series, “building bridges.”
Having been long neglected, investing in infrastructure is back on the policy agenda. It is featuring prominently in debates ahead of this year’s G20 in Australia, and is seen as a way to unlock the potential of many developing countries. Institutional investors and pension funds tend to favour long-term projects, such as infrastructure, because of their potential to generate a steady revenue stream over several years—essential to meet pensions providers’ long-term liabilities. Is there a way to unlock this money and meet the demand for building new infrastructure and maintaining existing ones while, at the same time, supporting economic growth?
Infrastructure projects are necessary not only to a country’s long-term development but also to modernise its economy. Up-to-date, well-maintained and efficient infrastructure—from transport to communication networks—increases productivity and improves the standard of living. Building and maintaining infrastructure also has an impact on economic growth and job creation.
But there are downsides. Political considerations can distort the efficient allocation of resources and projects may be selected not on overall merit but for their narrow political worth. There are too many unnecessary bridges and empty airports. Public funds have been wasted on projects with no economic or social value, but which delivered a short-lived boost to growth and jobs.
In addition, building physical infrastructure can often result in a considerable loss of welfare for some groups, especially local residents. Balancing costs and benefits is politically difficult and often results in huge delays in bringing a project to completion.
Because large infrastructure projects tend to be publicly funded, budget constraints and political considerations have created a serious infrastructure gap in the UK. According to the National Infrastructure Plan published at the end of last year, this gap is at least £375bn. New infrastructure is needed in many sectors, not least in the roads system: the Department for Transport estimates that by 2025 road congestion in England will be 27 per cent worse than in 2003, with a 12 per cent rise in time spent travelling.
Since 2012 the National Infrastructure Plan has had only modest success, limited in scope and scale due to balance sheet constraints. Of the current projects it sets out, 90 per cent are in energy and transport. HS2 is identified as one of the 40 top priority projects. The UK Guarantees Scheme and the Pension Investment Platform have been created to ensure that infrastructure projects can raise the necessary funds. These are positive steps but they are not enough. It is necessary to ensure that projects are big enough—usually around £80m—to meet the requirements of large institutional investors. In addition, political issues need to be dealt with before fundraising, especially for projects that are attractive to investors—those with the potential to deliver the steadiest return, such as toll roads and airports, but are also politically the most controversial.
To promote and support infrastructure, policymakers need to set up a framework that allows the public and private sectors to work together on big projects, and enables institutional investors to unlock funds for them. Clarity, predictability, transparency and governance are all crucial. Investors need to understand the risk and how to manage it. Taxpayers need to see that public funds are being spent efficiently, in well-chosen projects that will enhance collective well-being. Those adversely affected by the building of new infrastructure need to be closely informed about how decisions are being made and the wider benefits it may bring.
The challenge is to create a circle of efficient investment, sustainable economic expansion, productivity growth and healthy finance. Llewellyn Consulting estimates that, if the National Infrastructure Plan were fully implemented, it could generate more than £400bn, or 25 per cent of UK GDP. Infrastructure investment on this scale would provide support for long-term growth as opposed to short-term speculation and help to increase financial stability.