How not to report a Budget, or, the infrastructure gap

I’m sorry for the delay in updating this blog. I wanted to write something mildly entertaining for my next post, but the UK Budget has happened since then, so it’ll have to wait.

“Excitable” would be one way of describing the tone of the Evening Standard’s article predicting good news for infrastructure on the eve of the Budget. Political editor Joe Murphy, who presumably had just been anonymously briefed by one of the Chancellor’s special advisers, seemed genuinely convinced that there was going to be a big boost: “Mr Osborne is determined to speed up the pace of big infrastructure investments”: no qualification there; no ‘he claims he is determined’; no sir, he really is determined.

Not determined enough, sadly to announce a breakthrough in the items suggested in the article: (a) the Northern Line extension to Battersea (b) any deal with the Qatari government about getting them to finance infrastructure (not explicitly promised, but if not, why mention them at all?) or c) additional support for the £4 billion Thames Tideway Tunnel or ‘super-sewer’.

Let’s take these one by one. The Northern Line extension is going to be financed and the Chancellor has already, before the Budget, done all he can, i.e. he has given Transport for London permission to borrow £1 billion to pay for it. So quite what the breakthrough was meant to be is baffling.

The Thames Tideway is even less in his area of competencies. The money will be borrowed by Thames Water and it can borrow in comfort, knowing that the regulatory framework under which they own and operate their water infrastructure means they are allowed to get a return on their investment in that infrastructure through user charging. In other words, water bills will go up as necessary to pay for it. Because Thames Water is guaranteed by regulation to be able to do this, it can go out to the markets to raise finance safe in the knowledge it won’t be told it’s too risky.

And so we come to the Qataris. Yeah they have a lot of money, and they do invest in new build in this country, but that new build is property, which is easy to understand compared to infrastructure. And here we come to the bit in the article that made me smile the most:

“Gas-rich Middle Eastern state Qatar is said to be planning to invest £10 billion in infrastructure projects in Britain, including road and rail projects.”

Yeah right. Since when does anyone in this country invest in rail projects, when our rail infrastructure is owned and operated by quasi-state-owned Network Rail? High Speed 2 is being publicly funded, simple as, so that doesn’t count.

As for roads, well, the government has been trying to think of ways to attract private finance into the roads network. But since when has a sovereign wealth fund tried to invest in what is very clearly implicitly being talked about here – about finding the money for building new infrastructure?

It doesn’t happen. Last year, I exclusively reported for Infrastructure Journal that Abu Dhabi Investment Authority was bidding to buy the concession rights to operate the Turkish motorway network, which the Turkish government was trying to privatise (in the end, the tender was scrapped).

But those roads were already build and had traffic coursing through them and paying tolls. Which means two things: one, that they weren’t taking a risk on construction; and two, that they weren’t taking a risk on traffic being high enough to get a good return from tolls.

What’s more, the Treasury knows this isn’t how they work. The ‘infrastructure delivery update’ published alongside the Budget last week says:

“Chinese sovereign wealth funds continue to make sizeable strategic investments in the UK, including the China Investment Corporation in Thames Water and Heathrow Airport and the State Administration of Foreign Exchange in Veolia Water UK. Interest from the Middle East in investing in UK infrastructure remains strong. Most recently, it was announced in February that Sutton and East Surrey Water Group has been sold to the Sumitomo Corporation in Tokyo, for around £160 million. The company supplies water to more than 655,000 people in Surrey, Sussex, Kent and London.”

So in other words they are very keen on investing in infrastructure that has been built, is up and running, and has a rock-solid guaranteed revenue stream because of that regulatory framework for the water network I mentioned earlier. Not so much for building anything new.

Meanwhile, there’s precious little sign of how the government is going to persuade the private sector for paying for the new projects that it tells us we need. More on that later.

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About René Lavanchy

You can contact me at rene dot lavanchy at googlemail dot com.
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