3d rendering of windturbines on the ocean
Brexit rumblings are growing louder as the UK government faces pressure – against the Covid-19 backdrop – to agree a deal with the European Union, with the clock ticking.
Infrastructure is just one of the many areas that are currently tied up in the UK’s relationship with the bloc. It’s difficult to see, for example, how the UK can remain a shareholder in the European Investment Bank (EIB), the world’s biggest provider of climate finance, once it exits stage left. Some of the country’s biggest employers, including the CBI lobby group, are calling on ministers to create an infrastructure bank to channel public-sector cash, stimulating the investment of private-sector money into infrastructure such as transport, broadband, housing and green-energy projects.
A like-for-like replacement
In theory, a like-for-like EIB replacement should be straightforward to justify – the EIB has served the UK well, funding big-ticket infrastructure projects such as London’s Crossrail, the Northern Powerhouse Investment Fund, and major wind energy projects that have played a key part in establishing the UK as a world-leader in offshore renewables.
Government calls to ‘build back better’ from the pandemic should also put infrastructure investment at the forefront. While it is not clear if the UK will withdraw from the EIB altogether, Chancellor Rishi Sunak’s goal of rolling out £640 billion of infrastructure projects over the next five years will depend on setting up a credible organisation to channel public-sector money and, in doing so, encourage private-sector capital investment.
We’ve seen similar cases put forward following hard times of recession. Franklin Roosevelt’s New Deal argued that Relief, Reform and Recovery – the ‘three Rs’ – could bring economic stability to the United States during the Great Depression. And it did, with infrastructure playing a major part – the Works Progress Administration hired more than eight million people and built 500,000 miles of highways and nearly 100,000 bridges.
The UK’s Green Investment Bank (GIB) – created in 2012 by David Cameron’s Coalition government – is another case in point and illustrates how a new infrastructure fund can be set up from scratch. Without the GIB, the UK is unlikely to have secured the same scale of investment in renewable energy or the research and development needed to get offshore wind projects off the ground. Calls from environment groups for a second state-backed green infrastructure bank are testament to its success and the prominent role a replacement fund could play in keeping the UK on track to meet its climate goals while also boosting recovery.
Value creation and value distribution
At the same time as calling for a new infrastructure bank, calls to give project watchdogs more autonomy have been just as strong. But if the introduction of an infrastructure bank is made conditional on giving more teeth to watchdogs, they must also be asked to fundamentally rethink the norms by which they evaluate project performance.
Infrastructure development is about more than just creating economic benefits for users and freezing project scope early on to deliver within budget and on time. It requires bringing together key groups of stakeholders – who are often non-users of the future infrastructure – into the project’s governance structure to encourage cooperation and to open-up access to essential resources to value creation such as land and consents. But, this creates a social dilemma; stakeholders are looking to create mutual value, but also have incentives to compete to capture as much of the value to be created jointly. And so, an impasse emerges unless concessions are made to address the stakeholders concerns, which undermine economic value creation when measured in strict terms. The emphasis, then, needs to be on both economic value and social welfare as opposed to looking at project costs and economic benefits in isolation.
HS2 is a prime example. Sceptics are quick to point out that the high-speed north-south rail line’s costs are rising and these costs are usually only viewed from the Treasury’s perspective. “Go or no go” reviews seem to be never-ending, with the government calling for clear evidence, namely cost and potential revenue from user fares, ahead of passing the project through to its next phase. Many cost slippages, however, can be traced to social value creation such as longer tunnels to safeguard the landscape, green measures to equip the railway for climate change, more central city stations to trigger urban regeneration and job creation, and more recently, Covid-19 safety protocols. Yet, nowhere in the cost-benefit analysis these social gains have been monetized, meaning HS2’s value-for-money keeps declining as more concessions are made to address legitimate stakeholder concerns. There’s clearly a mismatch in thinking.
Re-setting the rules
Measuring and quantifying infrastructure value is admittedly difficult. The boost to local economies, like attracting investment, is tricky to determine and measuring the long-term impact on the economy and broader social gains is hard to gauge as a result. If a new infrastructure bank is created, changes to the current infrastructure ecosystem need to take place. The ways in which project performance is evaluated, as well as the ways used to measure value creation need to evolve alongside the banking institutions themselves. Put simply, for a new bank to be truly successful, the rules of the game must be reset. Let’s be realistic. Non-user benefits, and broad social gains more generally, have to be funded, and we cannot expect them to be funded for just by infrastructure users. In other words, to channel private investment in infrastructure, the public sector should act as the agent for the legitimate interests of non-user beneficiaries, and be prepared to purchase those benefits on behalf of the non-users, at a local and national level.
Nuno Gil, Professor of New Infrastructure Development and Ian Reeves, Visiting Professor in Infrastructure, Investment and Construction, Alliance Manchester Business School
