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Read the Fine Print on Boris Johnson's New Infrastructure Plans

Vince Cable

(Bloomberg Opinion) -- The new U.K. budget promises a massive new infrastructure push, especially for the “left behind” areas of England and Wales. That sounds positive; but large-scale infrastructure projects in Britain have a checkered record. If the government is to avoid past mistakes, it will have to show it has learned from them.

Four major projects that have run into difficulty illustrate the problems well. The first, CrossRail, is a 73-mile line running east to west across London, both under- and over-ground. Two years ago it was seen as a great success: on time, on budget and with an impressive U.K. supply chain. But problems in the complex software systems required for signalling and station operations meant the opening has been delayed for at least two years until spring 2021 soonest. The cost has escalated, adding 3 billion pounds ($3.92 billion) to the estimated cost of 15 billion pounds. The project has become an embarrassment for the publicly owned Transport for London and the contractors.

Then there is HS2, a high-speed line from London to Birmingham and, from there by a bifurcating route, to Manchester and Leeds. It was agreed in principle a decade ago but there have been growing doubts about its economic value (cost estimates have risen from 37.5 billion pounds to over 100 billion), the chosen route and environmental impact. Boris Johnson recently gave the project a green light, but even if the new line gets to Birmingham, the prospects for the northern sections have slipped back.

The third big project is the proposed 14 billion pound third runway at Heathrow. There has been wide agreement that London needs more airport capacity. Parliament voted  two years ago for expanding Heathrow, despite strong competition from other projects, unresolved questions over funding for the required infrastructure, fierce resistance from residents in west London over noise pollution and opposition from British airways, the main hub user.

The Court of Appeal recently upheld a plea by environmental campaign groups arguing that climate change impacts hadn’t been properly considered. The legal wrangling may end up in the Supreme Court but if the project is blocked, it will be a great relief to Prime Minister Boris Johnson, a long-time opponent of the scheme, who once promised to “lie down in front of the bulldozers” to stop it (the airport is next to his parliamentary constituency).

A fourth major project is Hinckley Point C, the first of Britain’s next generation of nuclear power plants. Like Heathrow, but unlike rail and road projects, power generation is seen as suitable for private rather than public finance. The project was agreed in principle back in 2008 and was expected to be complete in 2020. It is now likely to be operational at best in 2025, assuming that a new technology, yet to be proven, actually functions. The fact that it is under construction at all is due to the determination of Electricite de France (EDF), the owner of Britain’s nuclear industry, and what is generally regarded as an extremely generous contractual terms. The current estimated cost of 20 billion pounds will make this the most expensive nuclear plant in the world.

These four projects are very different in purpose, funding arrangements and stages of development; but all suffer from what has been called the iron law of megaprojects, which is that they run “over budget, over time, over and over again.” Over a decade ago an influential government report warned that, especially in transport, enthusiasm for these large-scale projects was distorting infrastructure priorities. Emphasis instead should be given to smaller, less high profile, projects connecting existing infrastructure. Such projects have higher returns and carry less risk. There is little sign that successive governments have paid heed.

A National Infrastructure Plan was launched in 2010 to remedy what was seen as the “uncoordinated, incremental, wasteful” approach to infrastructure planning. The U.K. has a National Infrastructure Commission to identify long term priorities and an Infrastructure and Project Authority to track progress.

Rather than simply pledge more investment, the new Chancellor should explain to what extent the existing objectives have been met and recognize the problems inherent with large-scale projects. The Chancellor’s predecessor, Sajid Javid, talked airily about large additional sums for public investment but it was far from clear how this related to the infrastructure plan or to the fiscal rules. There are some big unresolved questions.

First, how will capital spending be accommodated in the government’s fiscal rules? The Treasury has long regarded capital projects as an easy target to squeeze under financial pressure. Capital is in effect treated as competing with current spending and at present there are great pressures to relax current spending. The sensible way to deal with this problem is to adopt the golden rule, originally employed by former Chancellor Gordon Brown, which commits to balancing only current spending and receipts over the business cycle.

Second, there is a whole series of Brexit consequences and a key question for the budget will be how honestly they will be confronted. The economy has slowed and will slow further, affecting tax receipts. Will the government allow deficit financing to grow? Or will the government’s concern for their financially conservative reputation take precedence?

Another consequence of Brexit is the loss of infrastructure project funding from the European Investment Bank -- important in itself and also in providing comfort for private investors. The government promised a replacement for the EIB but none is in sight. There is also uncertainty over future financial regulation. Infrastructure financing increasingly relies on pension funds and insurers looking for safe long term returns no longer available from government bonds. But the rules governing that industry -- known as Solvency II-- are EU based. Will they be tightened or relaxed post-Brexit?

A lot also depends on the government’s popularity and stability. More infrastructure could be funded if rail fares, water rates, electricity prices and other utility charges were set to generate more income and if tolls were to be introduced for road projects. But a populist government is unlikely to risk voter unhappiness, even if it meant fulfilling its promises to improve infrastructure.

(Corrects third paragraph reference to the HS2 route from Birmingham, adding Manchester. )

To contact the author of this story: Vince Cable at emailvincecable@gmail.com

To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Vince Cable is a former U.K. secretary of state for business and was leader of the Liberal Democrats from 2017 to 2019. He was previously chief economist at Royal Dutch Shell. He is currently a visiting professor at the London School of Economics. His next book, "Politicians and the Politics of Economics," will be published later this year.

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