Franchise foul-up: the wrong model

The debacle over the West Coast rail franchise shows the importance of financial models when making big decisions. Formulas need to be reviewed on a regular basis, but this rarely happens in the public sector Read more

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Town centres: the infrastructure alternative

Infrastructure investment should mean more than just new roads and railways. What if funding could also be channelled into town centre regeneration to help improve a place and stimulate demand? Read more

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Fiscal rules: outdated and self-defeating

Recent alarm about the level of debt held by Network Rail has highlighted how the Treasury’s archaic fiscal rules put artificial restrictions on the UK’s infrastructure investment Read more

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In a hole, by Judy Hirst

Unfilled potholes. Crumbling schools and community centres. Is this an overly alarmist vision of the future state of public infrastructure?

Not according to Baroness Eaton, Conservative chair  of the Local Government Association.

Launching a report this week, she argued for urgent action to offset the gap in projected capital spending (see ‘Local government calls for infrastructure funding powers’).

Unless ways are found to renew public transport, buildings and other vital infrastructure, we shall be ‘storing up big bills for the future’, she warned.

The LGA has a point. David Cameron might have tried to brush aside special pleading from ‘vested interests’ ahead of the Spending Review.

But it’s hard to argue with the claim – from the CBI and many others – that cutting capital spending by nearly 60% over the next five years is not a ‘smart choice’.

Reducing investment from £49bn in 2010/11 to £20.6bn by mid-decade will have a hugely damaging effect on the country’s social fabric.

The LGA argues – Obama-style – that investment in infrastructure is vital to help the economy recover from recession.

But the chancellor is not about to emulate the US president’s $50bn programme of public works. He is more inclined to say ‘no, we can’t’ than do anything that adds to the deficit.

Instead, the coalition is pinning its hopes on private finance (see ‘Not so fast’). When the Treasury body Infrastructure UK publishes its strategy for capital investment in October, it is likely to focus on market-based models, whether for health, schools or transport.

But with private investment levels down by over 20%, and the value of public sector assets in steep decline, how realistic is it to expect the private sector to take up the slack?

True, there are some interesting models being floated to replace the increasingly out-dated Private Finance Initiative. Municipal bonds, local tax breaks, and investment by pension funds, are some of the ideas around.

All are worth a look. But all depend on substantial under-writing by government. And none is capable of digging the UK’s infrastructure out of the bottom of the OECD league.

As Bank of England governor Mervyn King admitted to the Trades Union Congress this week, short-termist thinking carries a heavy price. ‘We let it slip,’  he told delegates, and ‘the costs of this crisis will be with us for a generation’.

The risk, unless the chancellor does some rapid rethinking, is that he will trip over a hole of his own making.

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Road signs: better safe than scenic? By Andrew Jepp

This week’s calls from ministers to reduce unnecessary street signs, railings and advertising hoardings, the latest in a wealth of cost-saving announcements, reveal a potentially short-sighted approach to the management of our public spaces.

Communities Secretary Eric Pickles and Transport Secretary Phillip Hammond have urged council leaders to ‘cut the clutter’ on streets and remove ‘scruffy signs and bossy bollards’. The character of our spaces is being damaged and taxpayers’ money wasted, they argue, in many cases unnecessarily, as signage is often installed in the mistaken belief that it is legally required.

However, such a heavy focus on the aesthetics of road signs, bollards and railings brings the risk of overlooking the potentially serious implications of removing them.

While times are tight and some people might feel the money involved in installing or maintaining signage might be better spent elsewhere, the same could be said for the costs associated with their removal. Clearing street furniture might, in some cases, be a massive undertaking and even a small reduction in the number of bollards and advertising hoardings that populate our streets would have cost implications for local authorities.

Yet perhaps of more concern to councils is the potential likelihood of increased litigation – which can be costly to councils in more than just financial terms. It seems one man’s trash is another man’s treasure. As Richard Kemp of the Local Government Association has rightly pointed out, signs that are considered superfluous by some are vital to others, whether on information or safety grounds. Removing signage might create tidy spaces but could also increase the risk of all kinds of accidents or public confusion.

True, the government’s calls for councils to involve local communities in the decision-making process might well help to reduce costs. Yet before decisions are made at local level, all the possible risk implications need to be closely considered or local authorities risk generating further costs, or harming their reputation further down the road.

In the rush to cut costs and under the guise of maintaining the character and beauty of our public spaces, we need to avoid creating potential new costs and problems for the future. Ultimately, it seems a more complex issue that might increase the chances of accidents, litigation and reputational damage, simply in the name of ‘greater clarity’.

Andrew Jepp is head of local government at Zurich Municipal

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Green light for road pricing, by Stephen Glaister

On the face of it, when it comes to the roads, Pay as You Go is not a phrase to be mentioned in polite company. It is guaranteed to raise the ire of motorists across the nation. After all, didn’t almost two million people sign a Downing Street petition against road pricing back in 2007? And didn’t that petition result in road pricing being dropped as official policy by the Labour Government?

Well, indeed it did, and for understandable reasons. But the RAC Foundation sees a day when such a scheme might be inevitable. Why? Because we have some rather big problems to address and no one seems to be dealing with them adequately. Here are some of them:

  • A 33% increase in traffic by 2025 because of population growth and economic recovery
  • An associated increase in congestion and unreliable journey times
  • An imperative to meet targets for cutting carbon emissions from road transport
  • Reduced spending on road infrastructure because of financial and political constraints
  • A significant fall in fuel duty revenue as cars become more fuel efficient and increasingly use ultra low carbon fuels such as electricity

At the heart of the matter is a lack of vision for the road network. There is plenty of political talk about the railways but nothing strategic planned for our highways and byways, which are used by most of us, most of the time, to get around.

Let me be clear. Pay as You Go is seen as an alternative to the current method of road user taxation; though if there were the public and political will, it could also raise additional revenue for spending on roads over and above the current tax take. Such a scheme would lead to behavioural change and a reduction in congestion. This would be good for drivers and good for the environment. It would also address the issue of falling fuel duty revenue in the decades to come as people switch away from hydro-carbons.

Philip Hammond, the Transport Secretary, does not support road user charging, at least not in this parliament. However he does recognise it could well have a part to play in the future. And that is a start. No Pay as You Go system is not going to be introduced overnight, but if it is a thought to be a solution for all the problems detailed above then its introduction needs to be considered sooner rather than later.

Now it might be that ministers have some other secret plan up their sleeves to deal with the future. Unfortunately, they seem rather reluctant to tell anyone what it is. In the absence of that plan, Pay as You Go might well be the best route ahead.

Professor Stephen Glaister is director of the RAC Foundation

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Taking charge, by Jon Sibson

Top-up fees have worked in other countries and must be considered as an alternative way of raising revenue

It’s not surprising that public spending and fiscal deficits have taken centre stage in the election campaign. Politicians are battling to convince not only voters but also the markets that they can address the need for a major fiscal consolidation post-election. When even the Bank for International Settlements chastises governments and points out that ‘drastic measures’ are needed to check the build-up of debt, we should all take notice.

PricewaterhouseCoopers’ latest analysis suggests a need for further fiscal tightening of around £30bn over the period up to 2015/16. This is to eliminate the current structural budget deficit within a timescale that the international capital markets will demand. Clearly the bulk of that tightening will take the form of a mixture of further spending cuts and higher taxes.

But an alternative to further tax rises would be to raise revenue by charging for services provided by the public sector. The use of top-up charges by government has so far received little attention.
Yet it is an area where the UK raises less revenue as a percentage of gross domestic product than comparable Organisation for Economic Co-operation and Development nations such as Australia and Canada. This was set out in our report, Time to choose: decision-making in an age of fiscal austerity.

The report shows that the revenue raised by charges in the UK is lower than in these other countries to the tune of almost 3% of GDP; interestingly, the same amount by which PwC believes the fiscal stance will need to be further tightened.

There are, of course, plenty of services that already have their costs covered, at least in part by charges: drug prescriptions, university tuition fees and paying for leisure facilities come readily to mind.

Transport also demonstrates how extensive charges can become, from parking fees (and fines) and workplace levies to congestion charging in London and toll roads and bridges.

Charging is not a panacea and many will point out that it is inappropriate for many services and for users unable to pay at the point of need. But if the UK could generate top-up income at similar levels to Australia and Canada, why should it not be actively considering this?

There are other reasons to consider as well as raising revenue. For instance, charging is a mechanism to manage demand and therefore the costs of providing services, and change behaviour through incentives, such as charging for missed GP appointments.

There are, however, downsides, including political difficulties, administrative costs and issues of fairness. In particular, charges are potentially regressive unless there is flexibility in the structure, including free minimum provision and offsetting changes to the benefits system for those in most need.

One solution would be to differentiate between essential and discretionary services. There could be a choice of top-ups for ‘premium’ services, such as higher fees for faster provision of services. The experience of low-cost airlines such as Ryanair shows us that charges for add-ons such as speedy boarding will be tolerated, but can be resented if they are seen as extra fees for basic services.

Such a regime is also already in place in parts of the public sector, as demonstrated by the passports system, where fees can be paid to the Post Office to check passport applications and to the Identity and Passport Service for a faster service.

To date, there has been limited debate on the pros and cons of charging. Indeed, it is a hardly a vote winner to raise charges as well as cutting public spending and increasing taxes.

But with the imminent onset of public sector recession, now is a time for politicians and public sector leaders to be brave and examine this option afresh as part of their battle to beat the deficit.

Jon Sibson is head of  PricewaterhouseCoopers’ government & public sector practice

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When the ice melts, by Tony Travers

The weather has once again generated ‘Britain in crisis’ headlines, particularly in relation to the suggestion that some councils were running out of salt.

Transport Secretary Andrew Adonis has attempted to semi-nationalise the control of salt, though in his kindly and boffin-like way has made the takeover seem less nasty than many of his colleagues might have done.

Once the snow melts, as it will, there will be the problem of the battered condition of the roads. Britain may have talent, but it will soon also have thousands of new potholes. These potholes will appear at precisely the moment capital spending for highways and pretty well everything else within the public sector is chopped severely.

Chancellor Alistair Darling has already announced a 50% + reduction in public sector capital spending from 2011/12. You can be sure that zealous civil servants and council finance officers will want to start reducing spending on capital as soon as possible. The trouble is, potholes are highly-visible and potentially dangerous. Even road-haters agree that cyclists and pedestrians need to be protected from dodgy road surfaces.

So how will Lord Adonis respond to the apparently contradictory pressures to fill in the newly-developed holes in roads while at the same time cutting spending on highways? He should point out that the deep cuts have not yet commenced and that, anyway, local roads are the kind of infrastructure that people notice.

‘Pavement politics’ remains a powerful force. If the public sees cuts in highways at a time when the weather has damaged them, there may be electoral consequences. Jack Frost is yet another impediment to the neat process of spending cuts that both government and Opposition members hope may lie ahead. The weather is a reminder of how councils and other parts of the public sector can be resilient only if they are reasonably funded. Higher taxes anyone?

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Crisis, what crisis? By Christian Wolmar

train_woolmarAlmost unnoticed, the railways are enjoying an investment boom. Major projects, such as Crossrail, Thameslink and the East London Line extension are under construction while electrification of the Great Western line to Bristol and South Wales and the Liverpool to Manchester route has been promised. There is even talk of building a North to South high-speed line but that will take years to even get on to the drawing board, although the idea has cross-party support.

There is big money involved. Crossrail, which will connect east and west London, is £16bn; Thameslink tops £5.5bn; and the East London Line will cost around £1bn.

Then there is Network Rail’s current five-year investment programme, which started in April this year and is worth over £30bn (though some of that is double counting and much is being spent on routine maintenance and renewal). It includes the redevelopment of Reading and Birmingham New Street stations, as well as a whole host of line improvements to speed up journeys on major routes such as Edinburgh to Glasgow and London to Sheffield.

This is the biggest programme of railway improvements in decades, but – and there has to be a ‘but’ – there is an air of unreality about it given that we are in a recession and public spending cuts are on the way. One train franchise, National Express East Coast, has just thrown in the towel and there are fears there might be others as passenger growth stalls.

And while there is a pretence that some of this money is coming from the private sector, the bald fact is that almost all of it is being paid for out of the public purse. There is an air of disbelief in the industry that all this investment will really go through during the spending squeeze.

There is, too, a worrying historic precedent. The last time that the railways had comparable amounts available for investment was the Modernisation Plan of the mid-1950s, when the Conservative government of the day embarked on a programme costing over £1bn (worth £22bn now, but proportionately even more). Electrification was going to be a central plank but much money was wasted on redundant schemes, such as huge marshalling yards and new steam engines. Within a few years it was dubbed a failure and a certain Dr Richard Beeching was appointed chair of British Railways. His recipe, of course, was quite the opposite and a third of the network was closed in the 1960s and 1970s.

However, the railways are better protected against such an eventuality than they have ever been. Thanks to the complex system of Network Rail negotiating its investment programme with the Office of Rail Regulation in five-year periods, with a budget guaranteed from the government, the railways’ money is virtually ringfenced.

An incoming government – Tory or Labour – intent on cuts to transport, would find it very difficult to cut back on the agreed programme, which happens to run until 2014. Privatisation might have been botched, as virtually all politicians agree, wasting billions of pounds of taxpayers’ money through the cost of making the changes and the continued extra subsidy that feeds through to private companies’ pockets. But it has had the undoubted advantage of guaranteeing the budget for the railways for the medium term.

There is a risk that some of the big projects might be scaled back or not go through. Crossrail, in particular, is vulnerable as the Tories are not unequivocally committed to it, and station redevelopments are inevitably dependent on property values, but most of this programme is safe. Rail is back in fashion and, while it does not yet have the status of education or health, there are no votes to be won in cutting rail investment.

The all-party support for a new high- speed line will also survive an election. For a few years, while studies are undertaken, it is a cheap commitment. It is only towards the middle of the decade, when real money will need to be spent, that the economic climate will dictate whether work actually proceeds.

Indeed, it is the roads budget that would be a more obvious source of savings since it does not have the same long-term protection as Network Rail’s programme. There will be no second Dr Beeching and the survival of the existing rail network is guaranteed.

Christian Wolmar’s new book, Blood, Iron and Gold: how the railways transformed the world, has just been published by Atlantic Books

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Ill-advised plans will take their toll

The cover story ‘Capital punishment’ (June 5–11) included the assertion: ‘It is widely believed that the capital schemes most likely to go ahead are transport programmes, such as toll roads.’

Schemes such as schools and hospitals have a guaranteed income, whereas toll road franchises that might spread over 30 years or more have a high demand risk. This obvious fact has been belatedly recognised by the banks.

In March, Canada’s public-private partnership scheme for a new toll bridge at Port Mann collapsed, with the government of British Columbia having to take over responsibility for the finance and the demand risk. At the end of May in the US, Florida’s Department of Transportation announced that its plan to lease the Alligator Alley toll road had collapsed as it had received no bids. In the UK, the risks can be seen with the M6 Toll. The last published accounts (to June 30 2008) for the M6 Toll showed a loss of £27m on a turnover of £60m.

Maybe the plan is to try to reduce the demand risk. A clue of what might be in store was revealed by a proposal currently being considered at a public inquiry for a new privately financed toll bridge near Liverpool. Part of the idea is that the existing free bridge – built with taxpayers’ money – would be handed over to the toll operator.
If this is the direction that the government is taking then it might be the one receiving the capital punishment – from the electorate.

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