Yesterday’s FT reported that the UK government is in talks with the Qatari Government, aiming to get £10bn of Middle Eastern investment into UK infrastructure.
To anyone who has been following the debate on UK infrastructure for the past two years this will feel pretty familiar. Back in 2011 Faisal Islam wrote about hopes that China might step up to the plate and invest in the UK.
The National Infrastructure Plan can almost be read as a shopping guide to potential investments in the UK and I have longed suspected that the talk of ‘leveraging infrastructure investment of up to £20bn from pension funds’ through a dedicated fund was as much aimed at Sovereign Wealth Funds (SWFs) as UK pension funds.
To me, this all begs a simple question – what is the expected return on these infrastructure investments?
I think it is safe to assume (unless we are asking the Qataris, the Chinese and pension funds to be very generous indeed) that it is positive in real terms.
Meanwhile the real rate of interest on British government borrowing remains negative.
As I’ve argued before, when the markets are prepared to lend you money at a negative real rate and there are available investments with a positive rate of return this is a close to a ‘magic money tree’ as you can get. Capital spending in the medium term will be self-financing.
It really is only the politics that are stopping us from doing this. The Treasury can see the benefit of increased infrastructure spending in the UK and despite negative real interest rates stubbornly refuses to actually do it themselves. Instead of the capital spending we need, we get a serious of cunning plans, wheezes and schemes (from guarantees to using pension funds to holding summits with cash-rich foreign governments).
Getting pension funds and SWFs to invest in the UK is not a bad idea and neither is the government’s infrastructure guarantee scheme. But a much better, more straightforward and simpler idea would be to listen to the growing chorus of voices urging a capital-spending, debt-funded stimulus.