Mike Gerrard: Infrastructure spend will put us on road to safeguarding futureComments Off on Mike Gerrard: Infrastructure spend will put us on road to safeguarding future
Investments in infrastructure are mostly for the benefit of future generations, not our own. So the decisions we take today about new runways, railways, roads, power and telecoms networks, water and waste management systems and much more should all pass a simple test: what would our grandchildren most wish we had done today?
It surprises many to learn that the decisions we do take about infrastructure investments are often the polar opposite of this. That is, we view the benefits to society of new infrastructure through today’s lens which sees their value progressively declining the further into the future we look. This inevitably gives a short-term bias to solving long-term problems. We point the binoculars at our feet when seeking the distant mountains.
But happily for the UK, at least, not for much longer. The formation last year of the National Infrastructure Commission means that we now have a body which can give voice to future generations and help avoid short-term bias in our infrastructure decisions. And with Brexit resetting the long-term direction of the UK, the importance of long-termism in our infrastructure decisions has never been greater.
Because of some accounting quirks, however, this change of investment horizon will not be enough to unlock our obligation to future generations – an obligation to leave our infrastructure in better shape than we found it.
Public loans to build infrastructure give future generations the opportunity to create wealth. These are quite different from loans to fund today’s gap between revenues from taxation and the cost of public services — that is, to fund a deficit. The latter is like an overdraft. The former is long-term finance for a tangible asset and “a road” to work that gives successive generations the ability to reduce and, hopefully, pay off the overdraft.
Yet insufficient credit is given by the ratings agencies and statisticians to countries that invest in their future through infrastructure, rather than finance their past through overdrafts. This lack of incentive for infrastructure investment is compounded by another, and also no doubt well-intentioned, accounting rule.
Some public infrastructure can be financed by the private sector. These project loans from banks, pension funds and the like are typically of low, investment-grade quality (e.g. BBB) because of the risks involved in project execution. Again, many are surprised to learn that we increasingly account for these loans as if they were Government debt in disguise. That is, we pretend that the loans are actually of top investment grade quality (e.g. currently AA-rated for the UK) even though they can (and do sometimes) fall into distress, with no hint of a Government bail-out in sight. It seems that when it comes to accounting for investment in infrastructure, we point the binoculars at a map and declare the world to be flat.
Because Government borrowing is tight, private-sector loans which are mistakenly upgraded to pseudo-Government loans in a nation’s books will crowd out much-needed genuine public investment. Wherever these accounting rules apply, whether in the UK, Europe or elsewhere, they also discourage the flow of investment into infrastructure.
National infrastructure makes modern civilisation possible. It deserves better and more suitable book-keeping rules and incentives if each generation is to thrive and fulfil its obligations to the next.
The problems faced by some regions of the world and their chronically underinvested infrastructure do, of course, run much deeper. Weak institutions and endemic corruption, to name two issues, may dwarf concerns about short-term investment horizons and unsuitable accounting rules.
Nonetheless, with the cost of long-term capital still at historically low levels, market conditions have never been better for the financing of infrastructure. So the test for our generation is whether we will rise to this challenge. All societies are judged by the inter-generational legacy they leave behind. And we have no reason to feel complacent, whether it is the state of the UK’s own infrastructure, or that of fellow nations.
You will see, without the need for binoculars, the blank stare of disappointment on the face of our grandchildren, looking in our direction, if we do not pass this test. Quite a contrast to how we view the Victorians. Only by trying to stand in the shoes of our grandchildren and looking “back at today” can we expect to get infrastructure right. This is the opportunity which the UK now faces — the more so, given Brexit — and which all of us should embrace.
Mike Gerrard is former managing director of the Thames Tideway Tunnel, ex-CEO of Local Partnerships and former deputy CEO of Partnerships UK