The Independent View: Road to recovery

At a Reform event this week, Vince Cable gave his response to our new report on infrastructure. On the key points there is much we agree on. Infrastructure is critical for economic growth, and with a £175 billion government budget deficit, greater private finance is urgently needed to fund infrastructure investments. Government has a role to play in infrastructure, but bureaucratic, interventionist policies will be a barrier to productivity.

The report finds that the UK is in the infrastructure slow lane, ranked 34th in the world on the quality of its infrastructure in a recent competitiveness study. Road to recovery suggests that politicians of all parties have been blinded by the “green heat of technology”, moving towards a more interventionist approach in infrastructure markets.

This comes at a high cost. In energy, £2.6 billion is being spent on Renewable Obligation Certificates (ROCs) and climate change levies which reflect a political desire to advance certain technologies and to create thousands of “green jobs”. Much like Harold Wilson’s “white heat of technology revolution” in the sixties, this green corporatist approach will fail to address the real problems: over-zealous bureaucracy and planning sclerosis.

Government departments have been clawing back their powers in infrastructure markets. Civil servants in the transport department are ordering trains and specifying timetables. The new energy department is using public money to finance four demonstrations of carbon capture and storage.

Reform’s research finds that the UK’s most successful infrastructure markets have been the most free – energy, telecoms and water. While the most heavily regulated – road, rail and renewable energy – have got stuck in bureaucratic treacle. Lessons can be learned from the successes.

With a £175 billion budget deficit, more private sector investment in infrastructure is urgently needed. Levies and taxes should be phased out to make way for a new culture of entrepreneurship in infrastructure. Companies should be allowed to build and use infrastructure more freely – for example, bidding for long term franchises (40 or 50 years, rather than 7 or 10) on existing rail services and roads needing upgrade.

Regulated charging and metering on all infrastructure should be allowed. Water metering would better manage demand of a scarce resource. Road user charges can reduce congestion and provide a return to private franchisers. Market mechanisms should be used more – for example, local people can be given an economic stake in major developments, such as a third runway at Heathrow, through cheaper flights, or an equity share in a scheme.

The UK faces a choice. It can continue down the road to nowhere, spending vast amounts of taxpayers’ money on subsidising uneconomic activity, while positive investments are blocked. Or it can take a new approach. The current fiscal position provides the best possible backdrop for a move away from green corporatism and grands projets, to a focus on getting better value for money through radically opening up the UK’s infrastructure networks and allowing the market to deliver. This is the approach needed to put the UK on the road to recovery.

* Lucy Parsons is Senior Economics Researcher at the independent think tank Reform.

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2 Comments

  • Andrew Duffield 15th Oct '09 - 9:45pm

    “Levies and taxes should be phased out to make way for a new culture of entrepreneurship in infrastructure.”

    Alternatively, collect the economic rent that flows to resource ownership from the provision of public infrastructure and make all such investment entirely self-funded, in perpetuity. Build entrepreneurship into the model by leasing or auctioning infrastructure rights on a renewable basis if you like, but by collecting the value of the owner/user benefits, the burden on the taxpayer can reduce automatically. And, as with the collection of all resource rents, there’s a major environmental dividend too. It’s called Liberal Economics. Simple.

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