Danny Alexander's privatisation plan won't build a better Britain
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Version 0 of 1. On Wednesday the Treasury announced a £375bn infrastructure investment plan, with three quarters of the funding coming from the private sector. In a Today programme interview the chief secretary to the Treasury, Danny Alexander, explained that Canadian and Australian pension funds were here to help with worthy social projects such as extending the runway at Birmingham airport. In the Treasury's spin this was a win-win story because "after years of neglect our infrastructure … needs renewal". This kind of announcement is part of news-flow management and it will be lost in today's headlines when the chancellor himself gives his autumn statement. Today's bad news is that higher GDP growth won't save us from more austerity and working longer for our pensions (with tax cuts postponed). But it is worth pausing a while to deconstruct yesterday's news because there's a backstory here about failed assumptions and broken promises, which helps to explain the mess we're in. Privatisation was about a promise of investment. Whenever state assets were sold off, the promise was that the newly privatised firm would tap the capital markets to bring in investment which the cash-strapped state could not provide. This is how Vince Cable and the government argued Royal Mail privatisation was necessary and beneficial. The rationale was much the same in the 1980s floats of BT and British Gas or the 1990s privatisation that broke up British Rail. The promise of private capital expenditure was not delivered, except in water. That was a special case because new regulations made investment in clean up mandatory and the regulator allowed the companies to charge the consumer and put the cost on the bill. Elsewhere, the private operators were investment- and risk-averse corporates under pressure to deliver shareholder value: their business model was not to bring in investment that would lower return on capital but to extract distributable cash from the legacy infrastructure that they had inherited from the state. The sound you hear in the background after privatisation is the giant sucking sound of value being extracted by pipe and cable utilities who have failed to renew our infrastructure. The results are most obvious in telecoms. BT is bidding for sporting rights against Sky, yet not investing in the replacement of old copper wire, so we have the compromise of fibre-optic cables running only to street cabinets in towns, not to people's homes, and no working plan for delivering rural broadband. Currently, rail is the only utility where large-scale new investment is going in and that is because not-for-profit Network Rail can issue state-guaranteed private bonds. So, privatisation has brought us unsustainability and growing problems about national security. Second-rate broadband provision is bad for competitiveness and worsening problems in energy supply have worrying national security implications. We are ill prepared for cold weather when we have a fortnight's back-up gas storage, and, in electricity, there are questions about whether the clapped-out generating system can keep the lights on. That is why a desperate government is bribing the French firm EDF to construct a new nuclear power station at Hinkley with extravagant guaranteed electricity prices. More broadly, the infrastructure plan shows that the government has learned nothing about how Thatcher-style privatisation does not work in capital intensive utilities. The infrastructure plan includes more of the same with the sale of 40% of Eurostar, a student loan book and bits of this and that. But selling assets will not get the government out of its current fix on infrastructure investment. The furore about energy prices shows consumers won't pay and the government can't pay, so where is the investment going to come from? The infrastructure plan shows that the answer is to bring in a second set of private-sector players (mainly pension funds and insurance companies) who will now provide the fixed capital investment. But this comes at a price, because the funds will add a second set of financial claims on the revenue stream coming from household consumers of utility services, whose bills will effectively include one charge for operator dividends and a second charge for interest on fixed capital investment. Maybe it wouldn't be too bad if the pension funds and insurance companies were British, because then what comes around goes around. Inside our national economy, the double extraction would be a transfer from all households that consume utilities towards the minority of retired households. But in the government's £375bn investment plan only £25bn will come from six British insurance companies. So it is retired Ontario and Melbourne teachers who will benefit. We need an alternative plan for infrastructure that recognises some basic realities. First, regulate privatised operators on the assumption that they are both extractive and investment averse so their margins should be modest unless they can prove they are taking risk. Second, rearrange domestic financial flows so that British pension funds can invest directly in infrastructure including social housing. Most British pension funds are earning no more than 5% from paper investments, why not get that from building something useful? Our editors' picks for the day's top news and commentary delivered to your inbox each morning. |