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Britain needs cheaper infrastructure, not accounting tricks

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Public funds should be used if they deliver at lower cost, says the FT.com.

The French utility EDF recently floated an eye-catching proposal to pay for a nuclear power station they would like to build in Britain.

During the construction phase of this facility, before a single watt of power was delivered, they would like to impose an upfront charge on every household in the country. The figure floated — if a guesstimate — came out at £6 on each bill per year. The number of years? Let’s say 10.

Now this may seem presumptuous, the idea of payment preceding delivery. The late infrastructure expert Martin Blaiklock used to liken it to a diner “being forced to pay for a meal at a restaurant before the restaurant has even been built, let alone served any food”.

But there is a financial rationale for the proposal. You see with capital-intensive, long-life assets such as nuclear power stations, financing charges represent a substantial chunk of the overall cost that needs to be recovered.

Charging upfront reduces this by avoiding the need to roll up interest during the construction phase, thus cutting the amount of compounded debt to be serviced and paid off during the life of the asset. So allowing the private owners to tax the public and the overall cost (and price of the eventually generated electricity) should come down.

Sounds like a good deal? Well in these confused times, it may seem that way. With mountains of infrastructure to pay for, and limited government appetite, any ruse will do.

But is it the cheapest deal for the taxpayer or customer? True, it’s a way of shaving the cost of private finance a bit. Whereas EDF’s current nuke under way at Hinkley Point in Somerset requires a weighted average cost of capital of 9.3 per cent, if you permitted the EDF tax (known in polite society as the “regulated asset base” model) with the next one at Sizewell, then that could fall to 6 per cent. What it doesn’t do is beat state finance. The UK government’s cost of borrowing is less than 2 per cent.

So why do it this way? One classic answer is that the state just cannot borrow all that money. Pile too much on the public sector borrowing requirement and there might be a gilt buyers’ strike.

Another is that the private sector brings a magic ingredient: that of extra efficiency. Those dividends can all be afforded through the savings on capital and operational costs that entrepreneurial managers bring.

Both claims are suspect. Let’s take the second first; the one about efficiency. It is difficult to find compelling evidence. For instance, England’s private water companies are no more efficient than Scotland’s state-owned one, according to a 2011 assessment by the regulator, Ofwat. That’s despite being privatised 30 years ago.

As for finance, there’s surely a distinction between selling bonds to fund current spending, and doing so to create real assets with attached revenues. If you think about it logically, it’s hard to see why a properly constituted national infrastructure fund with its own balance sheet — backed by highly rated assets — couldn’t finance itself at fine rates.

The losers from the current system are taxpayers. They pay more for the privilege of keeping assets off the government’s balance sheet, as those private sector premia are extracted in the form of higher charges — often for very limited or non-existent risks. Think about the English and Welsh water industry, where the companies have taken on £51bn of debt since being sold off debt-free in 1989, while paying out £56bn in private investment returns.

In the long run that means less productivity-driving infrastructure, delivered at excessive cost. State funding isn’t a panacea. Capital expenditure still involves equity risk that must be funded, either by state-owned entities paying private-sector contractors, or doing it themselves.

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