Back in February I wrote about the government’s aim to think long-term and the problems with turning that rhetoric into action:
“We must think long term” is a common cry in politics and government. Far easier said than done, but whether it is investing in early years education, making decisions over building new physical infrastructure such as railways, setting rules for pensions or a myriad of other decisions, government repeatedly makes decisions which only work well if they are stuck to for a long period of time and whose positive impact may not be directly felt for many years. For example, the failure to make decisions for the long-run and stick with them is one of the reasons infrastructure projects cost more in the UK than elsewhere…
Moreover, Labour’s one serious attempt to get long-term planning for infrastructure work – PFI and PPP (which, by using legal contracts, made it hard for governments to change their mind over projects) – has been heavily discredited for high costs and post work in many cases, including the notorious collapse of PPP on the London Underground.
Now it looks as if the government has found its alternative to PFI/PPP for sustained long-term funding of infrastructure work: getting the pension funds involved.
As the BBC reported:
The aim is for government and private investors to support both social and economic schemes over the coming decade. The government will provide £5bn up to 2015-15, then a further £5bn in the next Parliament.
The Treasury hopes two-thirds of the £30bn earmarked for infrastructure schemes will come from the National Association of Pension Funds and the Pension Protection Fund. Separately it is also seeking more investment in infrastructure from insurance companies and from China.
Good news.
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5 Comments
The govt can currently borrow money at ~2%. Why would we as taxpayers want to pay more than this to pension funds? Or the Chinese (who described the current plans as “lucrative” in the FT? If it is lucrative for the Chinese, it is bad value for us. The only exception would be if material risk was being transferred – but there is no evidence of that.
This looks to me like a form of smoke and mirrors, which will cost taxpayers dear.
Mixed feelings. @Tim, that rate we can borrow at is based on how much we are borrowing. If we borrow a lot more, that rate ultimately would rise. Also, where geographically do we want pension funds to invest? It would be nice if a bit more pension cash flowed around the UK economy rather than disappearing abroad.
We could also have (without spending more) a more sophisticated political model for capital spending decision making which sought all party support to cut risks and promote long term planning and continuity from one administration to the next. Debacles like the aircraft carrier procurement and building schools for the future shouldn’t happen as often as they do.
When I was my Council’s rep on the Greater Manchester Pension Fund from 2008 til 2010, the overriding priority of the Pension Fund was making investments that provided the best returns long term for their pensioners. Around 70% of the money was in shares, both UK and foreign, and there was also a UK property portfolio.
This pension fund – and it is one of the biggest and best run – will look at government offers in a commercial way. If the return is seen to be good, they will invest.
It will take bigger changes to get a Greater Manchester Pension Fund to change its approach to supporting Greater Manchester employment and investment.
We’re still a very long way away from pension funds acting in the public interest, rather than the narrower interest of their pensioners.
Ooh, err! yet another plan to move spending off the govt balance sheet to disguise the true position. In particular it will merely shift the burden – as other plans like student loans also do – to future generations. But presumably the politicians driving this think “pension funds” sounds nicer and cuddlier than PFI which has earned a deservedly bad name. Unfortunately as long as the govt is paddling in the wrong direction things will get worse, although the scale and complexity of its activities will make this hard to relate to any particular action.
Getting things right is actually rather simple. Firstly, adopt the axiom that, “Look after the pennies and the pounds will look after themselves” – in other words each project should be justified on its merits. In practice this is difficult because outcomes tend to be sensitive or very sensitive to assumptions but it’s not impossible. Evidence (like the recent Panorama) suggests that govt is doing the opposite and deciding the answers first (basically giving big handouts to its corporate friends) and this can only end in tears. Some integrity would go a long way.
Secondly, the return on each project should be higher than the cost of capital – the interest rate on govt borrowing in this case. “Returns” may be purely financial but with a lot of what govt does will include a judgemental and non-financial aspects and that’s perfectly okay. Govt has the lowest cost of capital (per Tim above currently ~2%) while the private sector pays far more. The longer the term of the project the more important (as a negative) a higher interest rate is, so for infrastructure projects, the higher cost of private (or pension fund) finance is is likely to be a big minus – not to mention all the “experts” feeding at the trough.
Incidentally, if Chinese funding is to be used where are we to get the export earnings to pay them back in future decades? We run a chronic deficit and have a too small and too weak traded goods sector.
Alastair – the sums we are talking about here are trivial compared with the stock of outstanding debt. As the US shows, if the markets like you, you can borrow a lot without affecting the rate you pay. Furthermore, if we sign something with China that requires us to pay them, then sooner or later that will affect our ability to borrow conventionally. Smoke and mirrors never work.