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Investable politics: will the spending review do enough to attract private capital?

The Chancellor of the Exchequer is expected to commit tens of billions of pounds to big infrastructure projects in the spending review.

The Chancellor of the Exchequer is expected to commit tens of billions of pounds to big infrastructure projects in the spending review. This will be the latest in a series of announcements designed to boost investment in infrastructure, all so far with relatively limited impact.

The announcement is likely to be an important step in meeting pressing infrastructure needs in areas reliant on public funding (e.g. road maintenance). But it will fail to tackle the root causes of the feeble track record of infrastructure investment in the UK, namely the lack of an institutional platform that supports the creation of credible, long-term policy frameworks based on cross-party consensus. The Government’s vision for infrastructure is set out in the National Infrastructure Plan (NIP). Its latest incarnation features a pipeline of over 550 public and private infrastructure projects valued at £310 billion over the next decade. Around 60% of this figure is expected to come from private sources. But this masks considerable variation between sectors – e.g. in energy and water expected investment is close to 100% privately funded. When the NIP was initially published in 2010, the Government said that this was the first long-term plan for UK infrastructure and that it was providing certainty and transparency to increase the confidence of investors and help businesses plan for the future. To help turn the NIP – seen by many as a wish list of projects – into actual building sites, the Government announced in July 2012 guarantees of £40 billion to infrastructure projects that had been struggling to access private finance because of credit conditions. Later in the 2012 Autumn Statement, an additional £5.5 billion of capital spending was announced for infrastructure investment over the spending review period. The 2013 Budget pencilled in another £3 billion per year from 2015-16. But, despite all of these initiatives, limited progress has been made, with only a small fraction of the planned investment actually materialising. With sovereign and corporate bond markets delivering unusually low yields, global infrastructure funds are not in short supply. But investors appear to be keener on the steady income streams and limited risk associated with existing infrastructure (e.g. £2.1bn of Canadian pension funds invested in the High Speed One rail link across Kent in 2010; and Chinese investment in Thames Water last year) rather than on the construction of major projects such as High Speed 2, new nuclear power stations or the Thames Tideway Tunnel. The main problem, as we have argued before, is that lack of clarity and policy credibility is undermining private investment. Frequent reversals and prevarication over key decisions load a prohibitive risk burden on to infrastructure projects. Compounding the problem is a planning system that fails to share the benefits of development with those who have legitimate claims on them, and gives disproportionate representation to individual interests in judicial reviews. Increasing infrastructure spending is likely to be an important step in the battle to ease congestion on UK roads and helping to ensure energy security over the next decade. Such an announcement from the Chancellor is also likely to start a protracted political debate over which party will spend the most in the next parliament on capital projects. Regrettably, it will fail to provide a long-lasting solution to the historically poor performance of infrastructure investment in the UK. A key piece of infrastructure is missing – a set of institutions that facilitates credible policy-making in areas that cross several parliamentary cycles, and that allows the benefits of development to be shared amongst those who stand to lose from it.

Publisher
Institute for Government

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