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Paying the way

June 29th, 2020

Christo (who died earlier this month) and Jeanne-Claude were two of our age’s most haunting artists.  Their life’s work – because we can fairly see it as a single piece – entailed the planning, project management and execution of the wrapping of ever more unlikely items.  Balloons, trees, islands, the Pont Neuf, the Reichstag and the gates of Central Park were all subject to a series of superficially short-lived installations.  As one critic said of their work, “to seek ‘the involuntary beauty of the ephemeral’ is to create the advent of surprise”. 

All artists have imitators.  This week Boris Johnson unveiled the Prime Ministerial plane that was wrapped in the union flag for a cost of £900,000.  This is a project every bit as pointless as Christo and Jeanne-Claude’s works, and equally stirring for the intended audience.  Christo used to note that opponents of their projects formed part of the works of art.  The Prime Minister has the same idea.  (To his credit, Sir Keir Starmer has cottoned onto his game.)

The country has far more substantial infrastructure projects ahead of it, and the costs are many orders of magnitude greater.  Some of them, like HS2, already looked eye-poppingly expensive. Since then, the country has been scoured by a pandemic and the government’s finances have been trashed.  

Yet the government signalled this weekend in briefings to both the Mail and the Express that it intends to double down on infrastructure projects. Somehow or other these infrastructure projects are going to need to be paid for – or abandoned.  

 If wishes were horses, beggars would ride.  But the problem of funding large infrastructure projects is not new.  Governments have other options for procuring thoroughbreds.

When times are tight, governments have long sought to enlist the help of the private sector by entering into public-private partnerships.  At least as early as 1430, an Act of Parliament was passed authorising commissioners to collect tolls for a period of three years, in order to finance the proper scouring and cleansing of the bed of the river Lea in east London.  The concept of turnpikes is even older.

In Britain, such partnerships now have a poor reputation.  On the one hand, the government and public opinion firmly believe that the private sector has fleeced it in many PPP deals.  On the other hand, many private sector companies find themselves barely able to make a worthwhile investment on many public sector projects.  When such companies over-extend themselves, as Carillion did, the risk falls back on the public sector, leaving both camps firmly dissatisfied.

Still, the government’s budgets look under unprecedented strain now.  With this in mind, the Social Market Foundation issued a report this month on enlisting private sector investment in infrastructure projects.  It had essentially two big ideas. The first was that governments should promise to take more seriously the need for the private sector to make a profit in infrastructure projects, so that investors could have confidence in the long term, and establishing a cross-party consensus on this and on the infrastructure projects to be pursued.  The other was that the government should look at new funding models – so pension schemes should be knocked together into superfunds so that they could efficiently invest and a new project bond market should be established.

These ideas have much to commend them.  The first of these is, sadly, in the current environment impracticable, while the second needs to be looked at from other perspectives.  

The report tacitly assumes that what is good for the country will be good for the investor.  History has long shown that not to be the case. There are numerous infrastructure projects of great public benefit that were disastrous for the investor.  The Panama Canal, the construction of Britain’s railway network and Canary Wharf are all examples of infrastructure projects that were far better for the public than for their investors. 

Designing investment structures that are appealing to investors requires a recognition that their appetite for risk may be lower than gung-ho politicians would like, with investors like pension schemes often looking for reliable returns rather than speculative longterm bonanzas.  This is very much achievable, as the SMF report states, but there are consequences flowing from this.

One of the chief of these is the need to address the political risk.  If an investor is making a steady index-linked return from an investment, someone is paying them.  In an infrastructure project, that someone is likely to be the general public in one way or another. You only have to see the annual hoo-ha about, for example, rising train fares to see how this could become very political.  

The SMF report sees the problem, but its idea of establishing a long-term cross-party consensus looks fanciful.  The weekend’s briefings are hardly a surprise.  The current Prime Minister has long seen infrastructure projects as a weapon in his armoury.  He has at various times for political advantage proposed an airport in the Thames, a garden bridge, a bridge across the English Channel, a bridge across the North Channel and been a leading proponent of HS2 and the 5G network.  Conversely, he made political capital out of opposing the third runway at Heathrow.  He’s not suddenly going to outsource infrastructure decisions to some cross-party committee.  Candidly, you can see why.

Nor could any putative saintly successor bind their own successors.  Infrastructure investors will remain concerned that political parties may at a later date jump on bandwagons to undercut infrastructure investors.  Populism is having a good run just now.  There’s no reason to assume that it is going to lose its appeal any time soon.

This concern is not easy to address.  You would need to have confidence not just in the current government to honour the terms of investment but in its successors of all stripes.  Many would find themselves reluctant to take even the first step on this road – without a suitable return built in, at least.

Perhaps part of the solution lies in one of the SMF’s recommendations, to accelerate the creation of pension superfunds.  They rightly identify fragmentation as a barrier to infrastructure investment.  A consolidation of investors would separately also act as a political counterweight when the interests of investors are to be considered – the losers from any rewriting of terms would be much more quickly identifiable as other members of the general public who are pension scheme members and not just gnomes from Zurich.

Moreover, a serious weakness of the report is to view this exclusively from the perspective of infrastructure.  Improving Britain’s infrastructure is, of course, a really good idea.  But it isn’t the only really good idea and there are other policy considerations to be looked at.  

The UK pension system works fairly well, all things considered.  There are good pensions arguments for encouraging consolidation into superfunds.  But when you start introducing other non-pensions motives for encouraging “urgent” consolidation, we risk seeing the original purpose of providing pension schemes – to provide for people’s old age – getting pushed down the pecking order of priorities.  For pension schemes, that should always stay the top priority.  Keep the horse in front of the cart.

Alastair Meeks