Britain, we need to get building

You don't need to be an economist to understand that investment in the nation's infrastructure is grossly inadequate.

Willie Walsh, chief executive of IAG, the holding company for British Airways, frequently takes to the media to express his concerns about the lack of runway capacity in the south-east of Britain.

Drought orders across great swathes of the country provide a sharp remainder of how little has been done by the privatised water utilities to create some kind of grid which allows water to be moved from high rainfall areas to harder pressed parts of the country.

Trunk roads are overcrowded, neighbourhood roads dangerously potholed and the need to improve capacity on the rail system is desperate. And a lack of investment in new power systems means there is a serious risk of power shortages later this decade while we await the arrival of new nuclear facilities.

In his Budget the Chancellor George Osborne made great play of the government's 2011 National Infrastructure Plan as part of the Coalition's intended projects, including a national roads strategy, plans for ultrafast high-speed broadband, a centre for aerodynamics and an upgrade of Network Rail's Northern Hub. He also outlined efforts to harness pension fund cash and sovereign wealth funds for investment in the UK infrastructure. The reality however, is that the value to the economy of all of these measures added together amounts to just 0.003 per cent of national output.

Yet there is ample evidence from work done by the OECD, World Bank and others, that show the payback from improved infrastructure can be huge if the money can be harnessed.

Certainly, there are big UK projects in the pipeline, including Crossrail and the plans for a £32 billion investment in HS2, providing a high-speed rail connection from London to Birmingham and eventually to Manchester. But it is scarcely off the ground. Critics note that while it passes within 12 kilometres of Heathrow, it will not directly connect the airport to Birmingham as originally envisaged.

Similarly, the government is starting to recognise the foolishness of its decision to rule out a third runway at Heathrow. But only now is it starting to recognise the harm that the halt on airport expansion is doing to Britain's economy. And the UK seems to lack the will, for instance, to pursue London Mayor Boris Johnson's vision of a new London airport in the Thames estuary connected to the centre of the City by high-speed rail.

Funding infrastructure development, at a time of national austerity, might seem an impossibility however Osborne, during his visit to Washington with David Cameron and subsequently in his Budget speech, looked to be groping towards a potential solution.

The Chancellor hinted that Britain should take advantage of its "AAA" credit rating and low borrowing costs on international markets by issuing 100-year or perpetual bonds, similar to the War Loans used to finance the First World War.

There is nothing however, to stop the government from issuing infrastructure bonds directly tied into projects. There could be HS2 bonds for the railway system and so on.

Such bond finance, building on a strong credit rating, is widely used in international finance. It is the main source of funding for the World Bank, which funds big projects in emerging markets, and the European Investment Bank that has largely been responsible for building road networks across the EU.

Maturities on the bonds could be matched to the needs of pension and sovereign wealth funds looking for sound long-term investment. What is fairly clear is that there are few incentives for such funds to take the risk of investing directly in road projects which may, or may not, eventually be allowed to charge users.

The small sums which the government is willing to put into R&D are pitiful when one considers the scale of the potential market. The economy faces a shortage of demand - that is holding up recovery - and up-to-date and modernised infrastructure if it is to be competitive in the globalised world. Osborne and the government need to get on with the job.

Alex Brummer is City Editor of the Daily Mail. His new book, Britain for Sale, is published by Random House today

    Last updated: 1:35pm, April 26 2012