Infrastructure matters - it must be saved from spending cuts

So instead they attack capital projects, cutting spending on infrastructure. In the days before privatisation that meant wielding the axe over telecoms, electricity, gas, water and airports and it happened with depressing regularity. Indeed a main driver to sell these industries off was to play catch up by getting the private sector to invest the money the state had failed to do. Thus this year the brunt of the cuts will likely be concentrated on the bits it still controls — road, rail, school and hospital building, clean energy and renewables, possibly new nuclear.

Yet everybody accepts that Britain needs to spend more not less on infrastructure. The UK Policy Exchange think tank estimates that £500 billion is needed by 2020 — others have put it higher still. Everybody accepts too that without this spending Britain is going to be hard-pressed to compete in the world or to remain an attractive place to do business. The money will have to come from somewhere.

Things will be further complicated in a couple of years when the bill for past financial excess falls due. Along with private equity and hedge funds, infrastructure became a fashionable investment in the years before the credit crunch even if the money tended to go into existing assets rather than new build. Inevitably too many of those running the infrastructure funds got seduced by the quick bucks they thought they could make from financial engineering rather than actually running the assets efficiently. This prompted many to over-pay for the assets they bought and put too much debt into the structures, much of which will come up to be refinanced in the next couple of years. There is a mountain of this stuff so rolling it over will be a huge challenge, given that most of the assets are worth less than the debt secured against them. At worst there is the possibility of severe dislocation in the sector as the structures are unwound. At best there will be a lot of chastened investors unhappy with the experience.

Hence the importance of a conference today organised by the Institution of Civil Engineers to debate the future of infrastructure spending and investment. The politicians were there — Lib-Dem Treasury spokesman Vince Cable, the Conservatives' shadow Treasury minister Mark Hoban, and Treasury minister Ian Pearson plus 40 or so others from across the industry. The point was not to persuade politicians to mend their ways but instead to see what needs to be done to mobilise private capital to fill the gap.

Infrastructure projects are by definition big, long-term and with an excessive amount of planning, regulatory and construction risk, so it is obvious Government cannot be shut out of the loop. It has to provide some stability, (or guarantees against instability) and in fairness it has shown signs in recent months that it recognises the scale of the challenge. Thus it formed Infrastructure UK just before Christmas under the chairmanship of Paul Skinner, former chairman of Rio Tinto, to improve — among other things — co-ordination across Whitehall and to establish what the country needs most urgently and where money should be spent.

Meanwhile pension and annuities funds in the UK are crying out for suitable long-term income streams which will match their long-term liabilities. There is some £1.4 trillion of funds under management in this sector, money which traditionally went into long-dated government bonds, the like of which is now in short supply or bonds issued by the banks, which have rather lost their lustre as a safe haven. In the absence of a suitable supply of bonds we saw yesterday how very large sums have poured into real estate in the past 12 months as fund managers looked for suitable long-term assets. Given the expertise abounding in the City of London it ought surely to be possible to devise financial structures which are acceptable to pension funds and which would allow this pool of capital to be tapped.

The engineers have been calling for the creation of a UK National Infrastructure Investment Bank or similar structure to act as a bridge to mobilise private capital. Vince Cable has promoted similar ideas. Several of the big hitters in the pension investment world also seem keen. In fact no one has come out against it which on one level is very encouraging. But on the other hand no one has actively taken it on either and it is time someone did. Time surely for the Bank of England or the Treasury to find a suitable chairman and tell him or her to form a committee with the brief to produce a plan to make it happen — sooner rather than never.