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The revolution might not be privatised

The UK government’s ‘infrastructure revolution’ could come with a change to how Treasury assesses projects’ value for money. That would help explain why the private sector’s role in it appears limited.

Last week, UK Chancellor Sajid Javid reiterated his pledge to ignite an “infrastructure revolution”, the details of which he will reveal in his budget on 11 March.

Anyone who’s tracked the history of his boss, prime minister Boris Johnson, may begin to quiver at such bold statements, given his record on infrastructure. As mayor of London, he drove through his £53 million ($68 million; €61.9 million) Garden Bridge idea, a London bridge for which money was spent and nothing built. There was the Boris Island airport idea on the Thames Estuary, rejected as uneconomic. His latest suggestion is an ambitious and expensive bridge connecting Northern Ireland and mainland Britain.

Javid though, one suspects, is less interested in vanity or fantasy projects, vowing to spend £100 billion on infrastructure over the next few years. He has already earmarked £2 billion to fix the very British, and boring, problem of potholes up and down the nation’s roads. Vive la révolution, indeed.

But Javid, although not pre-empting the Budget, has also provided other hints on what is to come. Shortly before the UK’s December election, he told UK magazine The Spectator about some of the government’s infrastructure priorities.

“Fibre-optic investment is [a] good example, with the 20 percent roughly that the market won’t do, because it’s uneconomic for the market itself,” he said.

There were other stated ambitions on transport, with the government keen to improve links in the north of England – even before many voters in the region voted Conservative for the first time, handing them a decisive victory.

“We’ve already said that we will invest in the Manchester to Leeds connection,” Javid outlined. “What we’re missing in infrastructure transport connections in our country is that everything’s well connected to London, but not cross-country.”

Added to this, recent reports suggest Johnson has ordered a review of all major projects, with a view to cutting or abandoning some. This, according to UK newspaper The Times, could include the HS2 railway line, for which an independent review has been undertaken but not yet published. The spiralling costs of the publicly-funded project are now expected to reach £88 billion.

And what of private finance initiatives and private investment in UK infrastructure in general? When asked, the market has long been confident, despite Philip Hammond’s October 2018 speech, that the private sector will still form a key role going forward.

One industry veteran has suggested packaging together small and large projects into a single vehicle. The private sector then can invest in “infrastructure evolution”, as he described it, alongside government.

Yet this does not seem to be the direction Javid is heading in, and that’s partly because his upcoming revolution is also of the spreadsheet.

As he told The Spectator, “the Treasury didn’t have models that could compute negative yields because they’d never thought this would happen”. Javid, however, is tweaking those models to account for negative yields and the expectation government will be able to borrow at rock-bottom rates for most of the new decade. That effectively means the return threshold projects used to have to clear is about to come down.

Javid told the magazine: “In the past, the Treasury or government models have understandably looked for the highest return. And a lot of that pushed you towards London and the South East – the number of people living there, the amount of economic activity and so forth. You’re not looking for those high-level returns that you looked for in the past that you got from the South East. But you can look throughout the country, and we can make many more investments.”

The new realities presented by lower borrowing costs for government and the need for UK infrastructure to better serve its provinces mean a revolution could indeed be on the cards. But some may have to watch from the sidelines.

Write to the author at zak.b@peimedia.com