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The danger of taking a wrong turn (weekly)

The UK government is getting its road plan into gear, but will private finance be allowed to help drive it?

Hailed as a “roads revolution”, the UK coalition government earlier this week unveiled a £15 billion (€19 billion; $24 billion) total investment in road networks around the country comprising 84 new schemes and 1,300 miles of new lanes.

As with many government announcements, this was in fact a story that followed an earlier story. The £15 billion headline figure had already been in the public domain for a while – what was added this week was the detail of all the schemes that would benefit. This did not prevent the government from exploiting to the full the opportunity to boast of substantial infrastructure investment ahead of next May’s general election.

The boasting is in some respects fully justified. The £15 billion is to be spent over the next five years, and thus allows the kind of long-term planning that is often frustratingly absent. It also supersedes the ‘stop-start’ nature of annual announcements that has been the hallmark of the roads sector in particular. Following on from the £375 billion National Infrastructure Plan, the UK is becoming rather good at creating project pipelines.

Furthermore, changes to the Highways Agency – which manages the road network – should bring about greater operational efficiency and help to ensure that the money is better spent. Those changes, outlined in the Infrastructure Bill currently proceeding through Parliament, would see the Agency become a government-owned company (GoCo) with the government as sole shareholder but with the day-to-day operational independence that one would expect will facilitate a more rigorous commercial approach.

But what of the role of private finance? Here, the plan appears to encounter a pothole. In 2012, Prime Minister David Cameron was talking passionately of the need for an “urgent increase” in private investment in Britain’s roads. Around this time a government paper was produced which put forward several models through which the private sector might invest, including PF2 (the revamped Private Finance Initiative) and a Regulated Asset Base (RAB).

However, by the time the “Action for Roads” policy paper had been distributed in July last year, reference to these private financing models appeared to have been quietly dropped. At the very least, there is not yet the clarity around the potential use of private finance that would allow infrastructure investors to get too excited at this point. And that’s even before you trouble yourself with the thought that, the very next day after the May election, any spending plan drawn up by the prior regime might be destined for the nearest shredder.

While PFI’s past controversies around social infrastructure may make its application to economic infrastructure too controversial (even in its revised form), many will be hoping that thoughts of applying a RAB model to the road network are ultimately given another airing. Some kind of regulatory underpinning would appear to be the best way of matching long-term institutional investors to a long-term investment opportunity.

Unless that happens, this week’s roads revolution – which lives up to its billing in certain key respects – may yet come to be seen as a missed opportunity.