David Cameron’s announcement that he was planning on getting private enterprise to fund roads in the UK has to be a contender for the worst idea since the Potassium Teapot.
While, in principle, the idea of private enterprise building new roads isn’t necessarily a terrible idea, any private involvement in refurbishing existing roads, widening motorways or improving junctions would be a financial mess.
In this case, private enterprise would borrow some money (probably from a pension fund), widen the motorway or make the junction better, then get some sort of pay off from the Government based on road/junction usage.
Unfortunately, private businesses can’t borrow at the same cheap rate that the government can (a 15 year Government bond is approximately 3% interest at the time of writing). Of course, the private business would have to make a profit too.
In short, that means that instead of just borrowing the money at a small interest rate, the Government would have the extra expense of the higher interest rate that the company would borrow at, and the profit element that the company would pay out to its shareholders.
Why would the government want to do this? It’s an accounting fudge. To borrow the money now would save cash in the long run, but it would result in an immediate increase in the Government debt figure. To finance it via some sort of PFI initiative would simply keep the initial cost of the improvements off the books, but have them recognised as an expense – a much larger expense – over the course of many years.
From the average road user’s point of view the change might be considered to be a good idea. Hell, we get extra roads, right? Or junctions widened? I’m a road user – I drive a good 10,000 miles a year and would love more investment in our roads. There are a lot of junctions that are at less than capacity, and a lot of local roads that need resurfacing. However, while I want more investment, I don’t want the government to throw away twice the money it would have spent on road maintenance on a ridiculous PFI initiative. To be clear, it’s not the investment that’s wrong, it’s the extra unnecessary PFI expense.
The idea is a way of giving away money in the future to make the books look slightly better today, and it’s the kind of thing the Labour party did for 13 years which has helped the economy crash horrifically.
We can’t have the Tories force us into PFI initiatives to satisfy their need to privatise everything they can get their hands on and we must oppose this measure. It’s not a liberal issue, it’s a “not throwing money down the toilet” issue and if we want to be taken seriously on the economy, we have to take long-term decisions for the good of the country, not be subject to short-termism to make it seem as if the country can balance its books when it can’t.
* Andreas Christodoulou is the Treasurer of the Northampton Liberal Democrats, works as an auditor in Leicester, and writes here in a purely personal capacity
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17 Comments
“any private involvement in refurbishing existing roads, widening motorways or improving junctions would be a financial mess.”
Sorry but, what do you think happens at the moment? Take a look at the consortium connect plus
http://www.connectplusm25.co.uk/
Yes, it’s a financial fudge, but worse than you say. It shifts the debt onto future road users.
The site WIlliam mentions is interesting, but what happens now is that the government mostly pays contractors at relatively frequent interv als – meaning that most contractors don’t need to take out the kind of long-term loans that the new proposals would require. I guess the M6, and toll bridges like on the M4 at Bristol, are exceptions.
I don’t think all roads would be invested in either, just the ones bringing in the most money.
The FT opposed it today, as being completely daft.
On the other hand, it might help to reduce unemployment significantly in the relatively short term.
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Oh. It wasn’t the banks, sub prime mortgages, mezzanine debt layering, inter bank lending failure? I agree, Labour should not have carried on with the “light touch” regulation introduced by the Thatcher government. We’ve had the same rubbish neo-liberal policies for over 30 years; that’s what’s wrong with the economy. Not the 13 years when Labour thought that being tories with red ties would be a good idea, the 33 years of shrink the state, being intensely relaxed about people getting really rich ( even if it was by exploiting the poor and the taxpayer). The LDs look just the same – not the people on the ground, but the leadership.
for some reason it left out the op quote:
The idea is a way of giving away money in the future to make the books look slightly better today, and it’s the kind of thing the Labour party did for 13 years which has helped the economy crash horrifically.
@jenny barnes
“33 years of shrink the state”
I’m afraid you’ve fallen for the rhetoric. The reality is rather different as this chart shows.
Hm, don’t know what happened to my html there. The link is: http://www.ukpublicspending.co.uk/spending_chart_1979_2010UKp_11s1li111mcn_F0t
@Richard Dean: “It shifts the debt onto future road users”. Actually, it shifts the debt onto future taxpayers. A system that shifted the cost onto future road users would be far superior.
@Louise Shaw: “I don’t think all roads would be invested in either, just the ones bringing in the most money” – except that at present, no roads “bring in money”. A system of road-use pricing would enable us to determine which roads were valued the most by users and allocate resources efficiently.
Malcolm – it would be interesting to see that graph as a stacked bar chart, showing the relative proportions spelt on health, education, welfare, defence, roads etc over the period.
@Malcolm Todd
You need to remember that the sudden blip upwards of public spending as a proportion of GDP wasn’t intentional – it’s there because Brown wrongly and hubristically assumed that the economy was in a steady state and that the tax receipts wouldn’t collapse dramatically as a result of a credit-crunch. His intention was to keep public spending low as a proportion of GDP and his mistake was to assume that the CIty knew what it was doing. Jenny Barnes is correct in pointing out that the current financial/economic failure is a result of 30 years of neo-liberalism – in particular, the fact that Labour fell in love with the City and stopped questioning what it was doing.
The reason the size of the state grew dramatically in the recession was because of a contraction in the size of the private sector. THe same thing happened in the early eighties. The size of the state was larger under Thatcher in 1983 than it is now at ~47% of GDP.
I am only an amateur doing management accounts for my own small business, but my understanding is that if you take on a commitment to pay money at a future date then that is a liability that should be in the accounts now. Why isn’t it in public debt figures?
Andreas is absolutely right. This is an absolutely bonkers idea, criminally stupid even.
@Steve
But the chart doesn’t show a steep decline followed by a static low period, then a sudden blip when the recession hits. If it did, jenny barnes’ claim would seem to be justified. In fact, the graph shows expenditure rising in the early Thatcher years (for much the same reason as the leap in the last 3 years), then falling, rising, falling and gently rising again. In 2008 (i.e. before the recession) it’s back to about the same level as it was in 1970 — as a proportion of the economy, don’t forget. I don’t know what a similar graph of taxation would show. My suspicion is that that’s where the deficit problem lies: not in some allegedly neo-liberal 33-year effort to “shrink the state” (which the evidence shows has been remarkably ineffective if it existed) but in a populist political obeisance to low taxation. It’s not actually the same thing.
@Richard Swales
A very good point, something the opposition to the last Labour government kept on about the then governments financial ‘prudence’ in keeping significant amounts of liability off the UK plc’s books. Now the opposition is the government they have gone very quiet about adhering to this accounting practice that is a legal requirement for private enterprises… Probably because they realize that by publishing this information they run a very real risk of downgrading UK plc’s credit rating,..
Unfortunately, the politicians believe in the distorted view of UK plc’s finances this gives and so feel able to commit significant amounts of taxpayers monies to political vanity projects – remember axing HS2 now would save significantly more than the government will save by messing around with Child Benefit, with significantly less negative public outcry and impact on the UK economy over the next 15+ years; interestingly the LibDem party support the HS2 vanity project so don’t expect them to champion the case for clarity in government accounting anytime soon…
Convenient that this terrible idea was raised when there was a light of heat on the Health & Social Care Bill. The timing of the announcement was interesting given the background of advertising and public relations of many of the Conservative Party Ministers.
Another off the books , PFI idea is definitely not what is needed to fund decent roads.
Good article which highlights how bad an idea it is though.