Snow, Snow, Glorious Snow: Funding and Financing Local Infrastructure in the UK

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Snow, snow, glorious snow. The UK is currently experiencing the impacts of the ‘beast from the east’ as cold air from Russia and eastern Europe creates the conditions that produce, in many parts of the UK, transport chaos. This type of periodic weather disruption to infrastructure is a reminder of how reliant we are on the functioning of an effective and resilient infrastructure network. Everyday living and all economic activity are facilitated by local and national infrastructure. Supply chains require national infrastructure for the movement of goods, raw materials, people, information and knowledge. Local infrastructure provides the links between home or business premises and local facilities as well as linking the local with the national and the international. There is a direct relationship between economic growth, local employment and infrastructure investment. On the one hand, localities that are extremely well-connected will have higher land values that will reflect the degree of connectivity, but also the strength of local economic activity. On the other hand, places with under-developed infrastructure and limited connectivity will have lower land values and weaker local economies. These are two extremes.

Infrastructure provides one of the primary foundations of local economic development. In the UK over £600bn will be invested by the public and private sectors in infrastructure over the next decade. Infrastructure investments are extremely expensive involving a complex process of project development and implementation. The returns on this investment occur over a long period. These returns take two forms. First, some infrastructure generates a direct economic return on the investment. In this instance, infrastructure provision is an exercise in balancing yields or rewards with risks. This type of infrastructure has been transformed into a commodity, an investment asset class, that can be traded. In the terms of classical economics, this infrastructure has a measurable exchange value. Second, infrastructure creates economic and social values throughout a national economy. Thus, the productivity of a business will be impacted by the quality of infrastructure provision. In this instance, infrastructure is conceptualised as providing a service or a set of complex use values. These wider and more complex economic and non-economic infrastructure created or facilitated use values are fundamental to the relationship between infrastructure investment, economic growth and wellbeing or liveability.

Yesterday, in London, the EPSRC/ESRC funded iBUILD Infrastructure Research Centre published a report entitled Closing the Gap: Local Infrastructure Business Models to support Inclusive Growth (iBUILD 2018). This is an important document that identifies a set of priority actions for the development of new or alternative local infrastructure business models. This is a hot topic in the policy world of combined authorities including the West Midlands Combined Authority (WMCA). This report develops five priory action areas and is partly in response to the National Infrastructure Plan that was published by HM Treasury in 2010. This was an unusual document to come from the Treasury as it was noted that the UK currently plans, builds and manages its infrastructure in a “timid, uncoordinated, incremental, wasteful”, manner. This statement was arguably an understatement. One only must perhaps consider how long it took to transform Birmingham New Street Station into Grand Central. The five core priority action areas go some way to providing an alternative, less timid and more coordinated approach to the development and management of local infrastructure to support everyday living. The recommendations are perhaps common sense, but it is important to remember that there has been very little ‘common sense’ regarding infrastructure delivery and management in the UK. The process is too politicized.

The five core priority action areas are:

  • Adopt a broader, integrated and more holistic approach to infrastructure.
  • Enable greater action at the local scale that reflects the distinctive nature of place but also connects with the national level.
  • Facilitate and capture all forms of long-term value.
  • Deliver infrastructure more efficiently and with less waste by aligning organizational capabilities and applying circular economy principles.
  • Accelerate uptake through practical action and demonstration.

Each action area comes with a set of recommendations. There are many important issues here including local decision-making to reflect the specificities of a local context combined with an emphasis on an integrated or systematic approach to infrastructure development, investment and management. This more integrated approach should include novel ways of capturing the value created by public sector infrastructure investments including a focus on various forms of land value uplift capture tools.

The definition of local infrastructure is contested and evolving. In 2013, housing was not considered by HM Treasury to be local infrastructure. This was unfortunate. Fast forward to 2018 and HM Treasury is beginning to consider housing as local infrastructure. This is an important development and a major policy breakthrough. Prior to 2018, housing was considered to be ‘hidden infrastructure”, but now it appears to be more likely that iBUILD Recommendation #2 (Priority Action Area #1) will be adopted. This states that “housing and ‘hidden infrastructure’, such as efficiency measures, should be considered alongside the large-scale capital investments with which they are interconnected, and within infrastructure and spatial planning processes”. There is no question that housing development and the spatial planning of new housing must include a focus on investment in local infrastructure that facilitates the incorporation of housing investment into local, regional and national flows of people, goods and data. Housing thus must become a core element of any attempt to develop an integrated approach to infrastructure across the West Midlands.

There is another important dimension to consider in the relationship between local infrastructure and housing. This is a chicken and egg problem – which should come first? Housing or investment in the local infrastructure that supports residential living. It may be that investing in the infrastructure that supports residential living is an effective mechanism to encourage the development of new homes or housing units. If this is the case, then the WMCA should identify those areas that are suitable for housing development and, if necessary, encourage development activity by facilitating local infrastructure investment.

The key issue is how to pay for local infrastructure. The answer to this question is perhaps simple. In some cases, the taxpayer pays via direct and indirect taxation. In other cases, the user pays access charges. But, some forms of public sector infrastructure investment have a measurable impact on land and property values. At the moment, this type of positive externality that comes from infrastructure investment is captured by the government via indirect taxation – property taxes. A key question to consider is the introduction of some form of direct taxation to recover the cost of public sector infrastructure investment. Thus, the value of a property might increase by £50,000 as a direct consequence of public sector investment that enhances the relative connectivity of the property. Some of this uplift could be captured, but the problem is the identification of this uplift and deciding how and when any such uplift should be taxed? This is a difficult question and it is one that requires a combination of innovations in land valuation techniques combined with a political debate. The danger is that this type of approach will be ignored as too politically controversial. In any case, perhaps the continued application of indirect taxation, combined with capital gains taxes, is the most appropriate mechanism for capturing these positive externality impacts. All this suggests that the UK needs to develop a debate regarding the funding and financing of infrastructure of all types with a focus on who should pay and who is gaining and in what way?

The iBUILD report highlights the critical importance of funding or revenue streams to support the cost of infrastructure financing – capital investment. The primary challenge facing all governments and devolved administrations is the identification of funding flows to support capital investment in infrastructure. Whatever happens, infrastructure will continue to be a political problem and the UK will still grind to a halt as soon as a sprinkling of snow transforms the landscape into a winter wonderland or an infrastructure nightmare.

References:

iBUILD (2018), Closing the Gap: Local infrastructure business models to support inclusive growth, iBUILD Research Centre Final Report. Newcastle University. ISBN 978-1-9996347-0-4

Infrastructure UK (2010), National Infrastructure Plan, 2010, First NIP, HM Treasury, October 2010.

This blog was written by Professor John Bryson, City-REDI, Professor of Enterprise and Economic Geography, University of Birmingham 

Disclaimer: 
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI or the University of Birmingham

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Author: John Bryson

Professor of Enterprise and Competitiveness, City-Region Economic Development Institute, Birmingham Business School, The University of Birmingham, UK

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