15 March 2024

Westminster’s short-termism is killing British infrastructure


Dig down to the roots of many of the most serious challenges facing the United Kingdom in 2024, and I suspect you will find a common cause: the total lack of alignment between the interests of politicians (and, in the short term, their voters) and the sort of time horizons in which investing – or failing to invest – in critical infrastructure pays off.

Nick Clegg, he of the now-infamous complaint that new nuclear energy wouldn’t come online until 2020, has become the poster-boy for this phenomenon. But he is not an isolated case. Time and again, politicians shunt hard decisions about major projects into what I’ve dubbed the bad version of the long-term: the one that never arrives, but surely will, allowing today’s politicians to focus on buying votes in the here and now.

Thus, no Secretary of State has stepped up and pushed ahead with the Abingdon Reservoir, despite having had the power to drive it through the planning system since the enactment of the Planning Act 2008. Hence no decision on a new runway for Heathrow or Gatwick (let alone both), or the Lower Thames Crossing.

This same problem is one of the biggest hurdles to the good, abundance-oriented path to Net Zero too. Delivering a clean grid with the capacity to maintain our quality of life, let alone improve it, will require huge infrastructure investments that nobody wants to make. Per the FT:

‘The direction of travel is the ‘electrification’ of the economy using clean energy, with wind turbines, electric cars and heat pumps taking the place of coal-fired power stations, petrol cars and gas boilers.’

‘This could require more than 460,000km of new onshore electricity cables by 2050, transporting up to 200 per cent more power from far more diverse and complex sources, according to the top end of industry and government projections’.

Notwithstanding that all that is projected to cost ‘as much as £350bn by 2050’, such cables often face huge local resistance, and politicians have precious little incentive to overcome it. Instead, where projects are not put off indefinitely, MPs and councillors advocate for vastly more expensive alternatives, such as underground or undersea routes – the money for which we do not have.

Similar misalignments abound. Perhaps the most egregious case is housing, where we first nationalised the right to build in 1948 and then devolved responsibility for planning to local authorities, whose electorates have a much sharper appreciation for the concentrated short-term costs of new construction than the long-term and distributed benefits.

They aren’t just restricted to the supply side, either. As I noted in my recent piece on university funding, the current system could almost be designed to maximise demand, because payment for degrees is all but totally divorced from those points where the actual value generated by a degree might be realised.

Our insistence on the purity of the NHS’ model means that demand is mediated solely by queues, and the bulk of private health spending is spent in a parallel market with little cross-subsidy for public services. Vehicle Excise Duty is both flat and not hypothecated to the road network, meaning the externalities of surging demand are not compensated for and we have a huge backlog of highway repairs. And so on.

Given that we have an ageing population, the pressure on key public budgets is only going to increase for the foreseeable future. Simply demanding that politicians start making long-term decisions is fantasy politics. They will always have an incentive to prioritise spending with short-term returns – and under nationalisation, to hold down fares and bills for short-term gains as well. But what is the alternative?

The path to a possible model is offered by, of all things, the water industry. Whilst far from perfect, it has consistently delivered much higher levels of investment in infrastructure than did the state prior to privatisation. This owes much less to any genius of the market (water is to a great extent a natural monopoly) but something much simpler – ring-fencing. 

The water companies collect bills and are then legally obligated to reinvest a substantial share of that money in the pipe and sewerage network. At no point does the cash get passed to the Treasury, to be frittered away instead on the priorities of the chancellor du jour. Thus, the investment is actually made.

Of course, thanks to the half-hearted way the Conservatives did privatisation, it is far from perfect. If it were up to Thames Water, for example, the Abingdon Reservoir would have been built by now. There are also definitely lessons to be learned about regulating such companies, such as with regard to their ability to load themselves up with debt.

But it does suggest a possible model, one that if developed could help to ensure better long-term investment. Consider the case of the railways.

Whilst there have been real improvements from the privatisation undertaken by the Major Government, in some ways it doesn’t really deserve the name. The Conservatives balked at actually reversing nationalisation; instead, they merely started selling short-term franchises on passenger services.

The train operating companies (TOCs) do not need to cultivate their reputation over decades or centuries, as the GWR or LMS might once have expected to do. They do not own the stations, track beds, or even the rolling stock. There is no cross-subsidy from freight, which is run separately. There is neither the means nor the incentive to privately develop new rail lines (and the DfT blocks such projects as are proposed) or to build and maintain attractive stations.

With Labour planning to end the current franchise model, there will be scope for a future Conservative government to take a different approach – and pursue the vertically-integrated model that built Britain’s railways in the first place.

Imagine that each of the major historic railways, or their modern analogues, were entrusted, lock, stock, and barrel, to a separate public-service corporation. It would receive the revenue from fares and freight charges, be able to borrow against its asset base, and have an incentive to maximise the value of those assets over the long-term, because it would capture the value thus created.

Just as with water now, the great bulk of these revenues could be ring-fenced for the maintenance and improvement of the railway network. Electrification and modernised rolling stock would no longer be competing with pensions for the attention of the Chancellor. To ensure this, each company could not only be regulated, but have its terms of operation baked into its foundations, perhaps via royal charter. Government could hold a golden share to further bolster the public interest. 

However, it would be they and not the Department for Transport that determined fares. This would prevent ministers starving the railways of investment and subsidising demand for short-term gain. Moreover, a railway that is run profitably (and given that the huge majority of the costs of a railway are up-front construction costs) is one that actually has an incentive to expand and can attract the private investment needed to deliver such expansion.

Hell, if ministers were feeling really bold they could even make such a corporation its own planning authority, allowing it to avoid the endless dance of delays and bribes that bloated HS2 to death and further stimulate rail investment by capturing the value uplift to nearby land, as happened with Metro Land.

Of course, this is just a sketch model. There may well be plenty of kinks in the specific proposal. But history abounds with evidence that this sort of structure – specialised and with much better alignment of incentives and resources – delivers results. Even in housing.

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Henry Hill is Deputy Editor of ConservativeHome.

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