Addressing Infrastructure Deficiencies in the UK

[petagny]

Borrowing to finance better infrastructure (and housing) has recently been brought to the fore by Vince Cable.

Here's an interesting report from the LSE's Growth Commission. Among the proposals is the following:


'We propose developing a new institutional architecture to
address the poor quality of our national infrastructure. This would
dramatically reduce the policy instability that arises from frequent
changes in political personnel and priorities, particularly in transport
and energy. The new structures would create the strategic vision
required to stimulate investment in these areas, comprising:
 
•   An Infrastructure Strategy Board to provide independent expert
advice to parliament to guide strategic priorities.

•   An Infrastructure Planning Commission to support the
implementation of those priorities with more powers to share
the gains from infrastructure investment by more generously
compensating those who stand to lose from new developments.
 
•   An Infrastructure Bank to facilitate the provision of finance, to
bring in expertise and to work with the private sector to share,
reduce and manage risk.'

There already is an infrastructure strategy, but this is what Dieter Helm said about it in a recent FT article:

'Having an infrastructure “plan” is a good idea. Only government can decide what sort of infrastructure systems Britain needs. Markets will not produce HS2 or new power transmission systems and they will not create a resilient water and sewerage system. But the latest national infrastructure plan, published in December, does not reveal such system planning. It is just a wish list of individual projects, including the widening of a Cambridgeshire A-road.'

http://www.ft.com/cms/s/0/ff450d84-6bbb-11e2-a700-00144feab49a.html#axzz2N9XdpY00

[John Short]

HM Treasury: Planning for economic infrastructure  - PAC Report 29 April 2013
Conclusions and recommendations

1. The Treasury’s Infrastructure Plan is a list of projects, not a real plan with a strategic vision and clear priorities. We are not convinced that a plan requiring £310 billion of investment in infrastructure is credible given the current economic climate, the cutbacks in public finances and the difficulty in raising private finance for projects on acceptable terms. The Treasury maintains that it has prioritised 40 projects and programmes, but as many of these programmes encompass broad areas this list covers over 200 individual projects whose relative priority is not clear. Given the financial constraints affecting both the government and consumers’ ability to fund infrastructure expenditure on this scale, the Treasury should assess how much investment can realistically be financed and develop a coherent strategy using tightly defined criteria to identify and prioritise projects.

2. Uncertainty over government policy can deter or delay investment in infrastructure projects and lead to additional costs. Investors will be reluctant to invest in projects until government policy is clear and consistent. They will be reluctant to invest if they are concerned that future policy changes may affect them adversely or they may require a higher return to reflect this risk. Government plans are inevitably subject to change, but unexpected changes create unnecessary investor uncertainty. The removal of the exemption from the 2009 Climate Change Levy for some combined heat and power plants in the 2012 Budget when investors had been assured the exemption would last until 2023 is an example of such a change that affected investment returns. The Treasury should work with departments to ensure that the consideration of policy proposals takes into account their potential impact on infrastructure investment and that unexpected changes are minimised to provide greater certainty to investors over government plans.

3. It is not clear what level of Government support will be required to ensure that these investment projects proceed. In order to attract the private finance required to implement these infrastructure projects at a reasonable cost the Government may have to provide different forms of support including direct grants, guaranteed prices for outputs, or agreeing to bear certain risks. The Treasury and departments should identify the support that will be required and the costs involved. Government support will be paid for by either the taxpayer or the consumer so openness and clarity about the impact of Government decisions is essential.

4. Investors must accept some degree of transparency over their costs, risks and rewards in delivering infrastructure projects given that the costs of government support will ultimately fall on taxpayers and consumers. Most economic infrastructure investment takes place in a private sector market where investor returns are often supported by government and households bear the costs of infrastructure in their bills. In return, investors should provide sufficient information to show that their returns are reasonable and that any government support is justified. The Treasury should require investors to supply the information needed to facilitate this transparency and should reserve the right to audit such information.

5. Consumers will bear the brunt of the costs of the projects in the Infrastructure Plan through higher charges but the burden they face has not been quantified. Most of the costs of economic infrastructure will fall on citizens as consumers rather than taxpayers. With household budgets under pressure consumers have limited scope for adjusting their spending on costs arising from infrastructure investment in many areas such as utility bills and fares. The Treasury should identify the impact of planned infrastructure expenditure on the disposable incomes of different types of households.