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Trains, planes and automobiles or roads, railroads and airports. Most of the world's politicians believe infrastructure is the way to bridge the yawning gap between austerity politics and Keynesian pump-priming. David Cameron, the British Prime Minister, was on Thursday thumping the drum for 40 big projects, including roads, bridges, tunnels and high-speed rail lines.
Mr. Cameron drew a skeptical response from one Canadian investor – Neil Petroff, CIO of the Ontario Teachers Pension Plan, said the U.K. would have to fight for its share of capital because there was not enough money to fund all the government projects now on the drawing board.
With so many governments chasing infrastructure investment, private funds can cherry-pick the biggest and safest returns. This could lead to a sort of Dutch auction in which governments are forced to compete for infrastructure partners by offering generous grants and tax breaks. It's a game that Britain and other heavily indebted EU states can ill afford to play, and small wonder that many of the U.K.'s projects are mired in the planning stage with escalating costs. The list notably includes HS2, the proposed high speed rail line that would link Birmingham to London and the Channel Tunnel.
Teachers already has billions invested in Britain, including a stake in High Speed 1, the rail line connecting the Channel Tunnel to London, as well as investments in U.K. regional airports. Mr. Petroff reckons the U.K. needs to focus on a small number of projects and make them attractive. Unfortunately, Britain is not just struggling to get going the dream projects – fast rail, new hub airports for London – it is losing investors in vital energy infrastructure.
In March, SSE, a leading U.K. utility, said it was shutting a quarter of its electricity generating plants and warned the government that a power capacity squeeze over the next two years could lead to blackouts. An EU directive is forcing generating companies to close their older coal-fired power stations for environmental reasons. However, the capacity gap is opening at a time when margins are being squeezed by high European gas prices. SSE said it would mothball a gas plant because it was unprofitable to run, and added that it would not invest in a new plant without government grants.
In Brussels, the European Commission seems to have finally woken up to the infrastructure dilemma that has been created by EU environmental policies. In a paper submitted today to the European Council, the EC notes that a fifth of the EU's electricity generation capacity is due to be shut down by 2020. However, because of weak economics, projects capable of delivering enough electricity to power Belgium, Holland and Denmark have been cancelled. The EU is importing shiploads of cheap coal from America, where the fuel has been displaced by shale gas. Europe has failed so far to stimulate any major investment in shale gas exploration but it is planning to shut down the coal-fired utilities that keep the lights on. It is not a policy environment which makes easy investment decisions.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.
Carl Mortished