26 March 2021

The UK should use the public markets to finance big infrastructure, starting with the railways


Did you know the very first Eurobond was an infrastructure deal? The Italian motorway network Autostrade issued it in 1963. It was for $15m and carried a 5.5% coupon. Ah, I remember it well… All those offshore dollars finally had something to invest in.

Fast-forward 58 years and we’ve got President Biden, somewhat surprisingly, proposing a $3tn long-term package to boost the economy through infrastructure investment, cutting carbon emissions, and reducing inequality. How does that connect to the Euromarket? Well, it’s all about dollars and how to fund them.

The priority for America will be physical infrastructure. It’s no secret that their roads, ports and airports, energy grid and dams all look increasingly third-world rather than new-world. There is general agreement on the need for 5G broadband, support for EV charging, and housing. Donald Trump said it, Biden says it. It’s unlikely to find such agreement in the polarised US political system, and there’s no doubt it will stall. After all, political agreement comes at a cost: egos need to be massaged – something usually achieved by ‘earmarking’ pork-barrel projects so that Senators can get their name on some bridge-to-nowhere. That, sadly, is the way politics works.

The more social goals like building a ‘human-capital’ economy based on equality and skills are high on rhetoric and low on detail, but would involve overhauling the education system, the great unsolvable of US health care, and building (dare I say it without being called a goddamn communist) social care. The prospects of agreement in Congress are even lower here.

The provision of national infrastructure is generally agreed to be a public good – but there are no reasons that good social projects could not be financed with private money too. After all, isn’t that what the S in ESG is all about? Stick a government obligor on anything, and it’s much easier to fund.

And there is plenty of cash around. Much of it is currently chasing yields in any financial asset with a pulse. The result of 12 years of experimental monetary policy has been massive financial asset inflation. What if all that money could now be recovered and made to work by funding decent return infrastructure? It’s a thought worth holding.

If projects produce good, dull, boring, predictable revenue streams, why wouldn’t an insurance firm want to match the returns an infrastructure project produces against its long-term liabilities? More predictable and less risky than trying to play stock narratives. Government payment streams are generally considered ‘credit’ good, but they raise issues of who is paying for them…and higher taxes are guaranteed to set right-wing blood pressure soaring.

The US and UK have been able to spend an extraordinary amount of money on securing the economy against the ravages of Covid-19. Biden just dropped a modest $1.9tn stimulus package into the US. Spending on furloughs alone in the UK exceeds £100bn, with a similar amount on additional medical services. Raising money appears to be easy in a crisis.

How much more should we spend now to build for the future with similar amounts invested in creating solid infrastructure and a human capital base, both of which would support stronger and more sustainable economies?

Curiously, it could happen in the UK – if the Government can get its act together. We are currently blessed with the strongest left-spending socialist government in UK political history, although it still calls itself Conservative. Couldn’t Rishi Sunak just keep the spending doors open to finance infrastructure rebuild, reform of education (especially at the tertiary level), a redefinition and relaunch of the National Health Service, and critical reform of government pensions and benefits?

All these things are possible, although the cost will cause conniptions for traditional Tory sound-money diehards. Let me talk to them, and I’ll explain how the magic-money tree works.

How much more could we be using markets to finance infrastructure? The experience has been mixed. Private Finance Initiatives (PFI) to finance Infrastructure developments have not always gone well. The collapse of Carillion in 2018 exposed how reckless government and dubious accounting on infrastructure projects failed to gel.

Do the locomotion!

I will admit; I have a personal interest in rebuilding the UK.

For the past year, I’ve been Working Away From Office. I say that because I’ve rented an office in our village rather than stayed at home. It’s tough in terms of not seeing colleagues and meeting clients (and a lack of decent/proper lunches), but it’s been a delight not being beholden to catching the train up to London!

The Southampton line to Waterloo had become a game of Russian roulette with five bullets in the barrel. The crux of the SouthWest Rail problem was a massive disconnect between passengers furious with service, train operating companies struggling to profit from their franchises, and the railway operator, ‘Notwork Rail’ being totally disconnected and unmotivated to deal with either. Everyone who knew anything about railways knows it didn’t work.

Great news, the failed railway experiment that blighted our lives (and certainly contributed to my health problems a few years ago) has been cut. What next?

We don’t know yet what replaces it. A White Paper has been delayed till after the local elections in May. That may be a sign we’re unlikely to be happy with the new railway proposals. Everyone says they favour better services and cheaper fares – in the past that inevitably meant fewer trains, higher cost tickets and lousy service. Whatever the solution to the UK’s miserable train service, it should put passengers first and foremost.

It’s a shame the Government didn’t use lockdown to shock the “blundership at Notwork Rail” into action and institute a wartime-style massive rebuild of the antique signaling systems that blight the system or relay tracks to allow faster trains. As the economy reopens, I suspect the rail system will quickly return to its normal overload, making it difficult to anything but basic maintenance.

Yet the experience of rail leasing firms, who finance and own much of the UK rolling stock, demonstrates the value to investors. If the Government can spend billions fighting pandemics, then the benefit to the economy of similar amounts bringing the railways out of the 19th century and fit for the 22nd might be moot.  A strong public transport system will clearly benefit the whole economy.

Railways as disruptive tech? Why not…

The car lobby – famously favoured by Conservative governments – may now be past its peak. If predictions of autonomous cars and Ubers for everyone are true, why own a car at all? I could have a driverless Uber pick me up and drop me at the station for a 25-minute fast train (currently 1 hour) to Waterloo, hop in another self-drive Uber to take me to watch Scotland hammer England at Twickenham again and back. Nice…Who needs a car?

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Bill Blain is market strategist and head of alternative assets at Shard Capital. He writes a daily market commentary called The Morning Porridge (www.morningporridge.com).

Columns are the author's own opinion and do not necessarily reflect the views of CapX.