Britain’s infrastructure woes are well documented, particularly when it comes to trains. Large-scale investment is needed to improve many of the country’s creaking services, ideally with a blend of state and private funding – something our Victorian forebears got right.
Newsletter from 15 March 2024
Britain is in dire need of infrastructure investment. The country’s rail network is plagued by delays and strikes, its roads are scarred by potholes, and water companies nationwide are under scrutiny for failing to prevent sewage from poisoning rivers and coastlines. Something needs to be done.
An additional £25 billion spent on transport, energy and water networks annually by the 2030s (rising from £55 billion per year to £80 billion) is what’s needed, according to a report from the National Infrastructure Commission (NIC) late last year. But with the public finances squeezed – as outlined in the Spring Budget earlier this month – finding the money for such an ambitious programme is another matter.
The government is limited in what it can do on its own, and so coordination with the private sector is vital. The NIC report argues that of the proposed £25 billion annual increase, over half will need to come from private firms.
Change is possible but only with the right blend of ‘market and state’. This week at the Economics Observatory, we have been exploring precisely this topic, turning – as we often do – to lessons from history for insights.
Victorian ambition
First up, Tehreem Husain (London School of Economics, LSE) looked at how physical infrastructure around the world was financed in the past. As he explains, the first era of globalisation (1880-1913) – when bond issuances were a key means of funding large-scale infrastructure projects– offers valuable lessons for today.
Faced with stretched balance sheets and mounting debt, it is very hard for the modern policy-maker to find the necessary funds to restore crumbling public services. But overcoming this challenge doesn’t have to mean reinventing the wheel – strategies used by the Victorians could be repurposed for the 21st century.
For example, in the 1800s, ‘railway securities’ enabled firms to raise capital quickly, while passing on some of the risk to the state. At face value, investing in the railway industry was a risky and expensive venture and, once spent, these assets weren’t recoverable – what economists refer to as high capital intensity and significant sunk costs. Investors needed reassurance.
Cooperation and coordination between the state and private rail firms helped to square the circle. The development of new rail lines were made attractive to investors through various schemes, including offers of guaranteed returns, investment safety (via sinking funds), defining collateral clauses and ensuring the marketability of securities. As a result, rail infrastructure boomed (see Figure 1).
Figure 1: Length of railway network, by continent (1860-1915)
Source: Mitchell, 2005
Delayed gratification
This Victorian story might sound a little as if we are looking at the past through rose-tinted glasses (incidentally, an idiom that seems to date back to the 1840s). But maybe the pains and frustrations of modern infrastructure projects have more in common with those of past centuries than we realise.
Padraig McKee and Chris Colvin (both Queen’s University Belfast) examine this issue in an Observatory article comparing Isambard Kingdom Brunel’s Great Western Railway with HS2, the high-speed rail line intended to link London to the North of England. They argue that the two projects faced similar challenges – both being over budget, past deadline and up against big civil engineering obstacles.
There are, of course, crucial differences. The Great Western Railway actually reached its destination (on 30 June 1841): the same cannot be said of HS2, with the second phase abandoned last year by prime minister Rishi Sunak. And the way that the two rail lines were financed could not have been more different.
The Great Western Railway faced competition from other train companies to secure funding from private investors with a clear profit motive. In contrast, HS2 was funded through government grants and established as an executive non-departmental body, which did not have to compete with other firms to secure funding. The rest, unfortunately, is history.
But it doesn’t have to be this way. Padraig and Chris highlight the variation in funding across different infrastructure types in contemporary Britain (see Figure 2).
Figure 2: Funding mix of infrastructure projects/programmes, by sector
Source: HM Treasury, National Infrastructure and Construction Pipeline 2021, September 2021
Over the past five years, energy funding has been dominated by private firms, including EDF Energy’s construction of Hinkley Point C, the first of a new generation of nuclear power station. At the other end of the scale, transport projects account for over 85% of public investment in infrastructure, with HS2 being the famous (and disappointing) example.
What next?
Solving Britain’s infrastructure woes isn’t just about funding. It’s also about governance. Take the NIC. Unlike the Office for Budget Responsibility (OBR) or the Bank of England’s Monetary Policy Committee (which play key roles, respectively, in fiscal and monetary policy), the NIC is not a statutory body. Instead, it is an executive agency of HM Treasury.
In an Observatory article posted in January, Anna Valero (LSE) and Bart van Ark (University of Manchester) argue that previous policy failures – resulting from short-termism, time-inconsistency and accountability issues – justify independent decision-making when it comes to infrastructure.
They call for the establishment of a growth and productivity institution to coordinate infrastructure projects and policies over the long term. If given statutory status – making it accountable to both parliament and the chancellor – such a body could provide credibility, in much the same way that the OBR has for economic and fiscal reporting.
While the challenges and failure to deliver infrastructure projects are reported in the national newspapers, often the effects are felt most locally. In a piece for The Guardianpublished earlier in March, John Harris calls on the potential incoming Labour administration to make local transport one of the core focuses of ‘levelling up’.
He argues that ‘a new government ought to symbolise its push to upgrade transport outside London by allowing at least one big city to create a new transit system, financed by a bond issue’ – just like the Victorians. For John, Bristol – the home of the Economics Observatory – is in desperate need of a transport system like Newcastle’s metro or Manchester’s trams. The right mix of funding and governance could be the way to get there.
Chart of the week
This week's 'chart of the week' captures the historical ebbs and flows of rail networks in six European nations. The UK, despite its pioneering role in the rail industry, now trails behind France, Germany, Italy and Poland in terms of active railway kilometers.
The rail network in the UK shrank significantly following the Second World War. Despite initially resisting nationalisation, British Rail brought the network into public ownership in 1948. For nearly half a century, British railways faced a managed decline, losing ground to road transport and shipping.
Amid stiff competition, the railways' financial viability waned, prompting the Beeching Report in 1963, which recommended drastic cuts to restore profitability. Though public outcry tempered the proposed reductions, the ultimate cull—a third of the network—indelibly shrank Britain's railway footprint, leaving it overshadowed by its continental counterparts.
Read Padraig McKee and Chris Colvin’s full article on UK rail financing here.
Figure 3: Railways across Europe, total active track (km), 1825-2021
Source: Eurostat; Mitchell, 2007
Visit out Data Hub here.
Observatory news
- IPR event. On Thursday 25 April, the Institute for Policy Research (IPR) is hosting a free, lunchtime panel event to discuss policies which might underpin a new vision for prosperity.
- Economists Diane Coyle, Anna Valero and Torsten Bell will be discussing the topic: Overcoming stagnation: A new strategy for economic prosperity in Britain?
- Full details and booking information can be found here.
