Danny Alexander’s infrastructure plan relies heavily on underwriting a vast amount of investment by overseas companies. It’s time to adopt the same borrowing rules as their governments.
Our borrowing rules are a mess. Anyone who wants proof should look at Danny Alexander’s infrastructure plans.
Last week’s plans majored on the new investments promised in two fields in particular, energy and transport. Looking at who is responsible for the new investment shows the tangled mess that the UK’s borrowing rules create, putting our industries at a disadvantage compared with the rest of Europe.
First, the government wants more investment in nuclear power and is planning to provide guarantees of £10 billion to ‘secure the big-scale financing not available in the markets’. The centrepiece of the package is Hinkley Point C, to be developed by EDF. But, apparently, EDF is not able to raise the money itself, so we have the irony of the government giving a guarantee to a government-owned company. The irony arises because EDF (Électricité de France) is largely owned by the French government, not ours, and has annual sales of over 70 billion euro making it the world’s largest electricity producer.
Contrast this with the business secretary’s attitude to the Royal Mail, for the moment still owned by the British government. He says ‘we can’t divert capital we need for schools and hospitals to Royal Mail – a very large business making substantial profits’. So we can’t allow a British firm that is currently a public corporation to borrow money, while we can help a French one to do so.
Across in the transport industry the ironies get worse. I’ve written before about the peculiar status of Network Rail, about to receive further subsidies for various schemes despite its non-public, non-private status. Its liabilities are now said to stand at £30 billion, in theory nothing to do with the taxpayer but inevitably underwritten by HMT given that Network Rail (like Railtrack) is too big to fail. If it were a public corporation, not only should its borrowing be cheaper but its liabilities would be on the books, not in some mystery space outside the public accounts.
To compound these ironies, the RMT union has just published research showing that 60% of Britain’s train operators are foreign firms, mainly ones owned by the German, Belgian or French governments. As they point out, the British government is rushing to re-privatise the east coast mainline, in a franchise operation that will very likely end up with it being run by another government-owned company, only this time not a British one. Yet all these companies are public corporations, run according to the same EU rules on government finances.
It’s odd too that the government is now keen to make the Highways Agency a public corporation. It wants to do this to give it ‘long-term funding certainty and flexibility which will enable it to deliver capital efficiencies’. When Danny Alexander made that announcement, was he unaware of Michael Fallon’s views on the strings that attach to a public corporation, at least when it’s the Royal Mail? Or was he setting up the roads network to be privatised later, as advocated by the Institute of Economic Affairs? If this were to happen, presumably any public subsidies for roads would then enter the same unaccountable mystery space as those received by Network Rail
The situation is a mess, and to be fair to the government its predecessor (which set up Network Rail and was criticised for its unaccountability) is just as much to blame. However, as was very apparent from the Alexander plan, public finance is still vital, whether for nuclear power, Crossrail or HS2.
When the finance goes to a company that is effectively underwritten by the public sector, the liability is best reflected in the public finances if that company is a properly accountable public corporation. At the same time, such corporations should have commercial freedom, as is hinted at for the Highways Agency and would be even more appropriate in the case of Royal Mail or Directly Operated Railways (who run the east coast line).
All we need to do is to adopt international rules about government borrowing – very much the rules used by the Germans, French and Belgians, in fact, whose state-owned companies we are happy to allow run our trains or provide our electricity.
Original post and comments: Public Finance