How much of this capital spending problem would be addressed if all these capital projects (probably impoosible for a lot of them, but bear with me) actually charged for their services? Pay per mile road charging, explicit tolls, if hospitals paid market rents (I presume they don't) etc?
The reason I ask is, if capital projects paid rent / fees / etc, then they would be genuine investment assets. Treasury would have at least some incentive to build them. If arranged appropriately, there would be some competition between the infrastructure so there would be an incentive to keep them operating properly ie. to keep up their spending. Perhaps there might even be a sinking fund for this purpose (heaven forfend!).
More than that, if there was an interest payment coming out of this investment, you could get a lot of the funding from insurance companies and pension funds. The government would need to take the equity stake for ownership purposes but also so it was the government that absorbed the cost overruns, but a lot of it could simply be funded privately.
Is it actually quite simple...and the Treasury can't see it or am I missing something very large (and possibly elephant shaped)?
No, actually you are just showing more imagination than the Treasury and/or successive governments.
The problem we have now is that privatization was structured very badly, to such an extent that it has discredited the very word. So we are left with a debate which fixates on either/or privatized or nationalized. This is very very dumb, but it is what happens when you 'privatize' national infrastructure assets by selling them to foreign investors and then allowing these companies to have an almost complete 'regulatory capture' which allows them to run wild and use those assets principally as collateral for all sorts of 'profitable' financial shenanigans. The example, in every line of this critique is, of course Thames Water, and its historic partner in crime (yes) Ofwat. See my earlier piece on Ofwat & the revolving door between 'leaders' of the water utilities and Ofwat (ie, Brandon Cox CBE etc).
This is a huge shame because, of course, there are other ways to skin this cat. I spent many years in Hong Kong, and there they have a far more sensible approach to utilities. The deal is really very simple, the companies are private (and listed), and are subject to a Scheme of Control, periodically reviewed, under which the companies are allowed a maximum rate of return on FIXED CAPITAL ASSETS, and price their product accordingly. Now, if in year 1 they charge too much, and achieve a return on fixed assets above the Scheme of Control Rate, that excess is banked and returned to their customers in the next year's pricing.
Now the great thing about this is that a) it provides all the incentive in the world for the company to build and properly maintain their fixed assets; and b) it provides investors with a very predictable and secure rate of return, which is attractive to, for example, pension funds.
Imagine you had this sort of Scheme of Control operating on our water utilities. First, and most obviously, they'd have immense incentive to maintain their pipelines, since the degree of leakage would imply a degree of depreciation in their fixed asset, which would directly lower their profits. Second, they would have every incentive to build-out the flood and sewage facilities, and also reservoirs, because this would allow them to legitimately increase their profits. It would be very directly in the shareholders' interests to concentrate on doing the stuff we want, and to charge for it properly/not excessively.
It works wonders in Hong Kong: the place doesn't run out of water, electricity, gas etc etc.
There's no reason why this could not be done here, and every reason why it should be. Unfortunately, no-one to my knowledge has ever considered this model for Britain - quite possibly because a) our political establishment are hopelessly ignorant and incompetent, and b) the Treasury doesn't like anything it hasn't invented itself. This intellectual malignity is the ultimately source of many of Britain's ills. I'd sack the lot of them, and bring in a couple of Cantonese old ladies with abacuses. We'd do better.
That’s fascinating. Thanks Michael. I don’t have your in depth knowledge, but it does seem to me that a large number of our problems could be solved by letting some combination of Singaporeans and hong kongers run our civil service.
How much of this capital spending problem would be addressed if all these capital projects (probably impoosible for a lot of them, but bear with me) actually charged for their services? Pay per mile road charging, explicit tolls, if hospitals paid market rents (I presume they don't) etc?
The reason I ask is, if capital projects paid rent / fees / etc, then they would be genuine investment assets. Treasury would have at least some incentive to build them. If arranged appropriately, there would be some competition between the infrastructure so there would be an incentive to keep them operating properly ie. to keep up their spending. Perhaps there might even be a sinking fund for this purpose (heaven forfend!).
More than that, if there was an interest payment coming out of this investment, you could get a lot of the funding from insurance companies and pension funds. The government would need to take the equity stake for ownership purposes but also so it was the government that absorbed the cost overruns, but a lot of it could simply be funded privately.
Is it actually quite simple...and the Treasury can't see it or am I missing something very large (and possibly elephant shaped)?
No, actually you are just showing more imagination than the Treasury and/or successive governments.
The problem we have now is that privatization was structured very badly, to such an extent that it has discredited the very word. So we are left with a debate which fixates on either/or privatized or nationalized. This is very very dumb, but it is what happens when you 'privatize' national infrastructure assets by selling them to foreign investors and then allowing these companies to have an almost complete 'regulatory capture' which allows them to run wild and use those assets principally as collateral for all sorts of 'profitable' financial shenanigans. The example, in every line of this critique is, of course Thames Water, and its historic partner in crime (yes) Ofwat. See my earlier piece on Ofwat & the revolving door between 'leaders' of the water utilities and Ofwat (ie, Brandon Cox CBE etc).
This is a huge shame because, of course, there are other ways to skin this cat. I spent many years in Hong Kong, and there they have a far more sensible approach to utilities. The deal is really very simple, the companies are private (and listed), and are subject to a Scheme of Control, periodically reviewed, under which the companies are allowed a maximum rate of return on FIXED CAPITAL ASSETS, and price their product accordingly. Now, if in year 1 they charge too much, and achieve a return on fixed assets above the Scheme of Control Rate, that excess is banked and returned to their customers in the next year's pricing.
Now the great thing about this is that a) it provides all the incentive in the world for the company to build and properly maintain their fixed assets; and b) it provides investors with a very predictable and secure rate of return, which is attractive to, for example, pension funds.
Imagine you had this sort of Scheme of Control operating on our water utilities. First, and most obviously, they'd have immense incentive to maintain their pipelines, since the degree of leakage would imply a degree of depreciation in their fixed asset, which would directly lower their profits. Second, they would have every incentive to build-out the flood and sewage facilities, and also reservoirs, because this would allow them to legitimately increase their profits. It would be very directly in the shareholders' interests to concentrate on doing the stuff we want, and to charge for it properly/not excessively.
It works wonders in Hong Kong: the place doesn't run out of water, electricity, gas etc etc.
There's no reason why this could not be done here, and every reason why it should be. Unfortunately, no-one to my knowledge has ever considered this model for Britain - quite possibly because a) our political establishment are hopelessly ignorant and incompetent, and b) the Treasury doesn't like anything it hasn't invented itself. This intellectual malignity is the ultimately source of many of Britain's ills. I'd sack the lot of them, and bring in a couple of Cantonese old ladies with abacuses. We'd do better.
That’s fascinating. Thanks Michael. I don’t have your in depth knowledge, but it does seem to me that a large number of our problems could be solved by letting some combination of Singaporeans and hong kongers run our civil service.