Earlier this week David Cameron announced plans to increase private investment in –and management of – Britain’s road network, which will be offered to investors on long-term leases. The hope is that institutions such as China’s sovereign wealth fund (SWF), which are looking for sources of reliable and attractive returns, will be tempted to fill the public funding gap in the UK’s infrastructure sector.
There is nothing wrong with this in principle, but whether it will lead to a better transport network at a lower cost to the taxpayer remains to be seen. This is likely to depend on three questions which have been largely absent from the debate so far:
- How will the returns needed to attract private investors be created? Given that SWFs can invest anywhere in the world, these will have to be rather high. Apparently a share of existing vehicle taxation will be ring-fenced to pay investors to maintain roads, perhaps allocated according to the level of road use. Given that maintenance is already funded from general taxation, this will only be cost-effective if the private operators can maintain the network more efficiently than currently happens, after they have taken their returns. For example, the Highways Agency has an annual budget of £1 billion. If investors require a return of 10%, the available pot is immediately £100 million smaller. If the private sector cannot do a better and cheaper job with 90% of the previous budget, the net effect on the public finances will be negative.
- What will be the impact of road pricing and private sector management? To encourage new investment, tolls will be allowed on new roads. Given that potential revenues will be highest where road use is greatest, this provides an incentive to build new roads where the demand is greatest. A day return train fare from Brighton to London during peak times now costs around £50 – more than many low-cost airfares. Tolls on the busiest new roads can also be expected to be very high. While this is sound economics, with prices being used to equate supply with demand, it means that only the relatively wealthy can afford to travel at the most convenient times and on the most popular routes. Across the train network, the cost both to the taxpayer and the travelling public has increased dramatically since privatisation in 1996, a reminder that private sector delivery does not automatically deliver the expected efficiencies.
- What will happen to the less lucrative parts of the network? Assuming maintenance payments for existing roads are linked to the level of use, the private sector would therefore be incentivised to focus on the busiest and most congested areas for both new and existing roads. This makes sense as resources would be diverted to where they are more needed, but becomes potentially problematic if less profitable, yet strategically important routes are neglected. This is precisely why private participation in public goods and services requires robust regulation: commercial and public interests overlap but are not fully aligned.
So, what has all this got to do with development?
Well, private participation in infrastructure has become increasingly important in developing countries, and this looks set to continue. This can produce great results, attracting new investment where it is sorely needed. But the same limitations apply. It is easiest to attract private money into the more commercially viable sectors (e.g. telecoms) than to vitally important but less lucrative areas (e.g. water and sanitation).
Also, while public bodies may be keen to maximise positive development impacts, for example, by ensuring water is made available in remote areas and is affordable for the poor, these can run counter to commercial interests. However, for the private sector, the best way to maximise returns is to charge what the market will bear and to focus on the largest market segments, typically in urban areas. Where there are trade-offs between development and commercial objectives, it is important that the former are not sacrificed to ensure the project is attractive to private investors.
Do commercial and development objectives overlap?
Commercial and development objectives overlap in many areas, but this is less likely where the poorest groups are concerned – this is true in both developed and developing countries. We are only just beginning to understand the conditions under which private investment can deliver better outcomes and cost savings, and where public support mechanisms are needed to ensure social objectives are also realised.
If the poor are to receive good services they can afford, it is often necessary for these commercial interests to be tempered by public intervention (i.e. finance) to ensure access and affordability. Increasing private investment in infrastructure is crucial in both developed and developing countries, but we should not pretend that it will achieve development objectives in all cases.
Good infrastructure is one of the keys to development and a prerequisite for a good quality of life. Similarly, developing a low-carbon infrastructure is a stated objective of countries at all income levels. Working out how to maximise private investment in ways that also maximise social and environmental outcomes – particularly given ongoing fiscal constraints – is a question that deserves far more attention than it currently gets.