• Cementing the road to recovery
    By David Oakley


    On paper, it looks simple. Interest rates are at record lows and the country’s infrastructure badly needs upgrading, whether it is the railways, the road networks or the congested airports.


    The government could, in theory, fund these building projects with cheap debt, creating jobs and improving the country’s infrastructure, which would, in turn, help revive the economy and lead the nation to the sunny uplands of recovery.


    Indeed, the need to deal with ailing and ageing infrastructure in the capital and across the country and inject life into Britain’s lacklustre economy is one of the biggest problems facing the coalition government.


    Gary Jenkins, head of Swordfish, the consultancy firm, says: “This government needs a healthy economy, as we all do. If at the same time they can improve the roads, railways and airports, then that is an extra bonus.”


    Alan Wilde, head of fixed income and currency at Baring Asset Management, adds: “I want to be able to get from A to B without congestion and of course I would like to see a recovery. It makes absolute sense to try and marry the two by improving infrastructure and rebooting the economy at the same time.”


    However, what looks simple on paper is much more complicated in reality.


    First, there is only a finite amount of money to fund these infrastructure projects, even in the good times, and these are far from good times. With public debt levels around historic highs, the government has arguably already overstretched itself. Second, at a stroke the financial crisis cut off one of the key sources of cash and loans behind these projects.


    The banks that stood behind and underwrote many of the loans to the companies that built or maintained the road improvements or the renovating of hospitals have, to a large degree, stopped lending as their balance sheets have shrunk and they have been restrained by regulatory rules.


    A senior infrastructure investor says: “In theory, this could be the ideal time to start pumping more money into infrastructure projects to boost the economy, but just because rates are low doesn’t mean the government can keep on borrowing to fund it.”


    He adds: “There is too much uncertainty out there. Companies are reluctant to borrow and put their balance sheets at risk, even though they have done well out of many of the infrastructure projects that the government has launched.”


    It is also sometimes forgotten that the taxpayer has to pay for these projects. They might be called private finance initiatives or public-private partnerships, but in the end the taxpayer will foot the bill through taxation or extra costs in their utility bills, rail fares or airport charges.


    For example, a £22bn upgrade of the UK’s ageing gas and electricity networks that will allow the connection of more renewable energy projects will add £11 a year to the average £1,310 annual household energy bill over eight years.


    Still, the potential for improving the economy through infrastructure initiatives and project finance is enormous, say some fund managers.


    Not only do the companies involved in the programmes gain, but so does everybody in terms of better schools, hospitals, road networks and railways. Companies such as Balfour Beatty, the engineering and construction company, Carillion, the support services and construction group, Serco, the international services company, and Costain, the engineering group, have all benefited from winning contracts under the government’s national infrastructure plan.


    Some of the leading power companies, such as Centrica and Scottish and Southern Energy have also benefited from energy and utility projects.


    The government came up with a plan in July that some industry figures and top investors have described as potentially game-changing as it is aimed at encouraging companies to step into the lending void left by the banks.


    The plan involves the government guaranteeing loans of up to £40bn for infrastructure projects. This will enable companies to borrow rather than relying on the banks to do it for them. The companies will be able to borrow more cheaply, at government rates, while it is likely to encourage more investors to lend to them.


    Richard Threlfall, KPMG’s UK head of infrastructure, building and construction, says this could make the difference to pension funds, which would happily lend to a company that has the backing of a “gilt-edged” government guarantee.


    But still, problems persist. One of the most imaginative initiatives was a plan for a new “super-sewer” under London, a multibillion-pound project that ministers say will end the dumping of untreated effluent in the river Thames while at the same time providing jobs and boosting the economy.


    Yet, there are now doubts over the £3.6bn project because of complaints from householders and some politicians that the building of the sewer will cause pollution and blight for residents in the capital.


    Even the more successful road building plans have drawn complaints from some local councils and residents because of the inconvenience and disruption they can cause in terms of noise.


    “In theory, it should be simple,” Swordfish’s Mr Jenkins says. “In practice it isn’t. Infrastructure projects play their part in helping the wider economy and providing some investors with assets they like in terms of solid income streams. But they are not the complete answer to the problems in the economy. There probably isn’t a complete answer to the problems of the economy.”


5/31/2020 8:22:01 PM