Mr Osborne's small plan for big infrastructure

Cranes at a construction site Will the new plan unlock investment?

It's hard to find an economist or pundit who does not want to see more public infrastructure investment in Britain to support the economy. Today the chancellor and the chief secretary are telling us they finally have a plan to make it happen.

They are so keen to get new infrastructure projects up and running, they say they're using the government's "hard won fiscal credibility" to make it happen. What they will not say is that they are spending any new money.

There's a new guarantees scheme to help unlock up to £40bn worth of priority infrastructure projects, the first of which could be awarded in the autumn.

There's also a new one-year, temporary programme to allow departments to lend money to smaller public-private infrastructure projects that might otherwise get delayed.

Finally, there's a £5bn export refinancing facility to help insure UK companies against the cost of certain big ticket foreign orders falling through. (Though that piece won't be up and running until the end of the year.)

The big questions are: what is it all going to cost? And how much difference is it going to make?

The official answer to the first question is it won't really cost anything - or at least, nothing that will formally count as new spending or new debt. Perhaps that should come as no surprise. After all, any thing that did cost the government upfront would immediately be labelled a "Plan B".

The temporary lending scheme is coming out of departments' own budgets. That, incidentally, has some doubting whether the investments will happen, since many of the relevant departments are already short of cash.

The guarantees will all be "off balance sheet", like the investments carried out under the Private Finance Initiative (PFI). In other words, the cost will only show up in government spending, when and if the government actually has to hand over any cash.

Mention of the PFI may well make some of you nervous. That was another wheeze dreamed up, years ago, to "unlock" a lot of new infrastructure projects, without the government having to take on the upfront costs.

In opposition, Mr Osborne criticised the way that PFI had been used simply to keep big projects off the government's balance sheet. The scheme had ended up costing taxpayers far too much, while private contractors had been offered a one-way bet.

But anyone who thinks the government is about to make the same mistake with these infrastructure guarantees can probably relax.

Read the details of today's guarantee scheme, and you see it has been written by an organisation determined not to take on one jot of unnecessary risk - and equally determined that private sector contractors not get a penny more than they need, even if the pennies in question are not going to show up in the public accounts.

Put it another way, it is a scheme that has been written by and for the UK Treasury.

It is unlikely to go down as another costly infrastructure fiasco. But it's possible it won't result in an enormous amount of new infrastructure either.

Here's a flavour of what I'm talking about. To qualify for consideration in this scheme, the Treasury says an infrastructure project has to be:

  • "Nationally significant, as identified in the Government's National Infrastructure Plan 2011
  • "Ready to start construction within 12 months (i.e. with all necessary planning etc consents)
  • "Financially credible, with equity finance committed and project sponsors willing to accept appropriate restructuring of the project to limit any risk to the taxpayer
  • "Good value to the taxpayer, assessed by HM Treasury to have acceptable credit quality, not present unacceptable fiscal or economic risks and to make a positive impact on economic growth."

All of that might sound reasonable. Prudent, even. But there is one further test, which some will find a bit over the top.

As well as jumping through all these hoops, to qualify for the partial guarantee (which will be tailor-made for each project) the backers must also be able to demonstrate that they definitely would not be able to go ahead without this carefully delineated government support.

In other words, it has to be a perfect project in every possible respect, but somehow not quite perfect enough to get up and running entirely on its own.

These are difficult times. There may well be projects that fall into this category. The Treasury itself says that up to £40bn worth could possibly qualify. But that is a maximum, spread over many years. And they have to pass all these tests first.

In today's tough environment, some will say if a project is that important, it's worth getting it up and running quickly, even if that does mean you end up giving more help than is strictly necessary. Put it another way, it might be worth incurring what economists would call some "deadweight loss" to make them happen. But that is not an argument that carries much weight at HM Treasury.

In its own national infrastructure plan last November, the government identified a pipeline of critical infrastructure projects worth £250bn.

Dieter Helm, a respected expert who has advised the government on this, says the true figure is closer to £500bn.

It would be nice to think there is a "free lunch" available here - a cost-free way for the government to lend its good standing in the financial markets to worthy private projects, to make it easier for them to raise the money they need.

That is why most economists thought this kind of scheme was worth exploring. There is now a massive gap between the government's current cost of borrowing and the cost for anyone else.

But, looking at the very careful way the guarantees have been designed, you have to wonder how much investment it will really unlock.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 23.

    Smoke and Mirrors.

    The apparent "hard won financial credibility" this (and I use the term loosely) government has more holes in it than a Swiss cheese .. and it smells like one too.

  • rate this

    Comment number 22.

    So in other words you can only borrow the money if you don't need it?

  • rate this

    Comment number 21.

    For as long as Interest rates are almost zero it is IMPOSSIBLE to properly evaluate investment decisions.

    The total CORRUPTION by the State in creating a FALSE MARKET in money to protect their bankrupt banking friends prevents the resumption of any normal economic activity.

    Schemes such as these are POINTLESS unless the banks are brought to heel.


    We need 40 not 4!

  • rate this

    Comment number 20.

    " Nationalization before throwing cash at plcs please."

    Where do you think the money to nationalise companies/services and pay for their investment, wages and pensions comes from?

  • rate this

    Comment number 19.

    I'll make it easy for you, Steffie, I am one who does not want to see more public investment in infrastructure.


    1. Govt does not have any money, it uses ours,
    2. It often asks for the money and then charges us more on top (E.Coast Mainline improve!), and
    3. It wastes money.

  • rate this

    Comment number 18.

    Big-ticket projects make the least efficient use of investment, from the general population's point of view. Only a small number of companies are ever in positions to bid for the works and the bulk of the money goes on materials and plant, much of which is imported. We need employment for more people at the lower end of the income scale, people who spend cash locally with small businesses.

  • rate this

    Comment number 17.

    It looks to me like a headline grabber (e.g. "UK launches £50 billion investment plan") that can be thrown into the electoral pot in a couple of years time as the great initiative, with most people actually having seen not an iota of benefit. Too little, too vague, too constrained, too late.

  • rate this

    Comment number 16.

    The government injected billions into the banks to save them fom going underwater. This only saw the bankers revive thir own bonuses instead of giving loans to small business and first time buyers. The crucial link to see any investment to help the economy be successful, has been removed from the scene. This link was the bank / business managers. They have been made impotent.

  • rate this

    Comment number 15.

    One of the purposes of this is surely to press the banks to lend more. By saying the Government will carry the ultimate risk (subject to all the preconditions that were announced) Osbourne has taken that mush risk away from the excuses banks have for not lending.

  • rate this

    Comment number 14.

    Less regulation would be better
    You can't even sell a cabbage on a street corner until you've jumped through a whole bunch of government hoops

    So most people do nothing

    Modern government is like the Clergy 500 years ago, stifling all human activity unless it has gone through approved ecumenical channels

    The more things change... the more they stay the same

  • rate this

    Comment number 13.

    Chief Secretary to the Treasury, Danny Alexander, sought to reassure people that the scheme would not be a drain on the public purse: "This is not a direct call on the taxpayer. That would only happen if something went wrong with a project."

    That's alright. Not much history of things going wrong, PFI etc. Simply more public money to private. Nationalization before throwing cash at plcs please.

  • rate this

    Comment number 12.

    It has to be said, it's a start.I suppose, if it's to be guarantees &off balance sheet there was little alternative to stringent controls.

    I wonder if, a bit like credit easing, it will be forgotten about in 6 months time or will be actively pushed to make a real impact. Perhaps George can not make that leap from 'A' to 'B'

    I do hope it's not an exercise in beeing seen to be doing something.

  • rate this

    Comment number 11.

    Several questions :-
    1) Who is actually going to fund these programmes? It can not be as it was with the PPP/PFI programmes an open cheque. These left us the tax payer with all the risk.
    2) What are they going to deliver? They have to be programmes that are going to be drivers for the economy going forward. It can't be building homes as this would then equate to a one hit wounder.

  • rate this

    Comment number 10.

    One can only hope, they see fit to invest some of it in re branding Britain and in particular... a root & branch reform of Tourism which accounts for 8% of GDP exactly the same as the doggy financial sector.
    UK Tourism is drowning in a deluge of rainwater & discounting.
    It's a fragmented mess, with the star rating assessment system ( run by G4S ) in terminal decline.

  • rate this

    Comment number 9.

    I am reminded of the New Works schemes of the 1930s. Did they make any real difference? We are in a similar stagnat situation. If those schemes worked, then this has a chance.

  • rate this

    Comment number 8.

    Fine intentions. Wonder if 'business' really does want to work, invest for the long term? Will this be taken up in the way intended? Malaise across industry, bad news for so long. People stay in their comfort zone, like those that failed to turn up for G4S or who take a sickie. Too many subsidies, tax breaks, rate reliefs no-one is hungry enough anymore to fight & succeed - too many soft landings.

  • rate this

    Comment number 7.

    Good idea. I think Hollande would approve.

  • rate this

    Comment number 6.

    Laudable though the raft of recent announcements are, they will not move the economic needle much this year or next, and they don;t address the two biggest issues business face which are 1) Confidence 2) Demand. Whilst they are useful programs in themselves, if this is the extent of Govt plans, I fear they are gravely underestimating the problem and the failing to find the right solutions

  • rate this

    Comment number 5.

    Strikes me as dangerous. Are we just deferring problems by mass investment now and when that investment stream ends, then what. We need slow and steady, continuous investment, so there is long term security, rather than propping up the markets now and letting these companies crash when the economy is more stable. But as usual governments only think ahead to the next election

  • rate this

    Comment number 4.

    the tragedy of the day
    so much to be done
    so many idle
    those with the money wanting a big fast return-the rich
    those who can get the money idelogically not inclined -the govt


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