|It is not just the Coalition government that has developed a soft spot for the word “infrastructure”. In the hard economic times still facing plenty of Americans, so has President Barack Obama.
He jetted down to the Port of Miami last week to make a renewed push for Congress to approve fresh spending on what most surveys agree are America’s increasingly dilapidated bridges, roads and ports. As politicians scour for ways to reignite economies, you can see the allure of investing in infrastructure: it creates jobs, improves vital economic cogs, such as ports and power stations, and is an easy idea to sell to voters.
That, at least, is the seductive theory.
But, as project managers on construction sites frequently find, George Osborne, the Chancellor, is discovering that delivery is an awful lot harder. Few companies have so far taken advantage of the Treasury’s £40bn plan to underwrite financial risk on major infrastructure projects.
“If the Government wasn’t making such a big play of infrastructure, I wouldn’t criticise it, but the amounts are very small,” says Richard Abadie, an expert on infrastructure at PriceWaterhouseCoopers and a former Treasury official. He argues that the Government should dig deeper to improve and, in some cases, help build new infrastructure in the UK.
In a country that has only just begun to chip away at its $17 trillion (£11 trillion) debt, Obama faces the opposite criticism: that he wants to write cheques for new roads and bridges when the US can least afford it. That did little to dampen his enthusiasm in Miami, where he introduced one new idea and wheeled out an old one.
The newer idea was a “Fix it First” programme. Irritating title apart, the proposal is designed to allocate about $50bn for an immediate upgrade to America’s worst bridges and roads. In the infrastructure jargon that governments have adopted since the financial crisis and recession, this plan is all about “shovel ready” projects that need workers to put their backs into it straight away.
The older idea is for a National Infrastructure Bank, something that was nearly established as part of the stimulus package passed during the depths of the downturn in early 2009.
That Obama visited sunny Miami to reheat ambitions for a National Infrastructure Bank is a symptom of the relative lack of progress towards building a political consensus on sprucing up the country’s roads, airports and public rail systems. It is particularly surprising because, as in Britain, the circumstances are propitious.
There’s no doubt that America’s infrastructure needs a facelift. Every four years, the American Society of Civil Engineers (ASCE) delivers a report card. In its latest assessment of the country’s infrastructure published in March, the ASCE actually upgraded the US from a D. But it still only got a D+, not the sort of improvement that would secure a student a place at a good university and certainly not enough to help America compete in an increasingly globalised world.
If the need is there, it is increasingly clear there is money, too. Not principally from the coffers of cash-strapped governments, but from pension funds. With returns on government bonds pitiful, the higher returns available through investing either directly in long-term infrastructure – or in funds that do – should appeal to pension managers with liabilities stretching out for decades. Most surveys suggest infrastructure remains a tiny allocation for pension fund managers who, when they venture outside the universe of shares and bonds, make property and private equity their first stops.
According to the Organisation of Economics Co-operation and Development, just 1pc of pension funds in the West were invested in infrastructure at the end of 2011. Recognising that overseas pension funds could be interested, Obama also proposed extending a tax exemption that US funds currently enjoy when they sell infrastructure assets to funds from outside America.
The existence of both the need, as well as a pool of cash, is making some dare to believe the political will could be found to encourage private capital to get more involved in rebuilding America.
“I’m more optimistic than I was in Obama’s first term that something will happen,” says Dan Flanagan, an academic who has been advising on infrastructure policy for the past 30 years.
The chances of success in using a mix of public and private funds to deliver big projects, or small but important improvements, will demand greater flexibility from politicians.
To encourage funds to stump up money, Flanagan argues that they need to be far more open to the idea of generating sustainable revenues through pricing systems, such as tolls.
At the same time, US taxpayers’ interests need to be vigilantly guarded in a country that has been more reluctant than Britain to privatise infrastructure because of political pressure not to give it away cheaply.
If a National Infrastructure Bank is created, it would need to have a politically independent board, says Barry Bosworth, an economist at the Brookings Institute.
Even the most ardent advocates of greater spending on infrastructure agree it is no panacea for the current economic challenges facing the UK or the US. There are knotty problems that are hard to solve. Pension funds, for example, are loathe to take on the construction risk in new projects, which create the most jobs. You typically need more people to build something than run it. Osborne has found this to his cost as Canada’s big pension funds – pioneers in infrastructure investment and already substantial owners in the UK – have proved reluctant to sign up to new projects.
Politicians on both sides of the Atlantic must avoid handing on the debts racked up over the past decade to future generations, yet investment is crucial to ensure both economies are still competitive in 30 years’ time. With pension funds open to persuasion, providing the conditions are right, it should not be beyond the wit of both Washington and Westminster to make progress.