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Infrastructure can be a bad investment

  • US & UK politicians are calling for more government spending on infrastructure. Philip Hammond should be cautious of this approach at the Autumn Statement. 
  • UK Government should focus on improving the quality of infrastructure development (particularly by harnessing private investment), not simply allocating more public funds. 
  • Over-investment in infrastructure can be damaging. 55% of Chinese infrastructure projects are estimated to destroy economic value. 
  • Nine out of ten large infrastructure projects are over budget. On average, rail projects are 45% over budget. 
  • Trialling of new Project Bonds could boost private investment. Warrants awarded to the Treasury mean taxpayers benefit from excess profits, avoiding problems with the discredited PFI. 
  • UK Government should encourage private investment in the areas of broadband, airports, ports, energy industry, roads and social housing.

 SUMMARY 

Keynes is back, or so it seems. Often justified in terms of being “affordable” in a world where the current cost of government borrowing is extraordinarily low, advocating high levels of infrastructure spending is firmly in fashion. In the US, Donald Trump is proposing to “invest” $550 billion on building the “roads, highways, bridges, tunnels, airports, and railways of tomorrow”, exactly doubling Hillary Clinton’s pitch in the presidential election to spend $275 billion in direct spending on infrastructure (plus another $225 billion in loans). In the UK, the Shadow Chancellor John McDonnell MP has proposed an even more lavish £500 billion infrastructure programme (equivalent to 27% of annual UK GDP, compared to Trump’s planned 3% equivalent of US GDP). Although more modest in scale, the Chancellor, Philip Hammond MP, has also announced his intention for more spending on infrastructure.


But is this race to spend more and more on infrastructure sensible? And would it not be better to focus on the quality of infrastructure spending, as opposed to the quantity?


To ask these questions is not to suggest that today’s UK infrastructure is ideal. Much needs to be done in areas such as, for example, broadband, energy, (some) rail improvements, airport expansion and seaport development. The right questions to ask are how these projects should be prioritised; how they should be funded; and what should be the role of the private sector in bringing sensible projects to fruition.

 

  Infrastructure Quality Not Quantity 

Media Coverage

Daniel Mahoney, Tim Knox and George Trefgarne - Friday 18th November 2016

Daniel joined the Centre for Policy Studies as Head of Economic Research in November 2015. He was promoted to Deputy Director in March 2017. Prior to joining the CPS, he worked in research roles for a number of parliamentarians.

Tim Knox was Director of the CPS from 2011-2017. Before he was Director, Tim was the Editor at the CPS - a position in which he was responsible for publishing papers by every Conservative leader since Mrs Thatcher as well as by hundreds of leading academics and opinion formers.