Monday, 29 June 2009

Building Our Way Out Of The Recession

By Nick Louth, exclusive to MSN
June 23 2009

In a bid to create jobs during recession, $30 trillion is being spent on infrastructure across the globe over the next 20 years.

This gigantic sum will be put to work to renew roads and bridges, expand airports, build rail lines, fix water pipes and sewers, establish clean energy schemes and generally put right decades of under-investment.

"Governments all over the world are buying jobs. And the infrastructure sector is where many of these jobs will be created," said Benjamin Tal, author of a CIBC World Market report into global infrastructure. Not only will hundreds of thousands of jobs be created, but there will be a bonanza for construction and engineering firms.

Board: When will the economy recover?

UK spending on a smaller scale
However, when it comes to Britain, everything, except perhaps the banking bail-outs, seems to be on a much smaller scale.

Though the government is likely to have £1.2 trillion of debt by 2015, most of that is borrowing to keep health, education and social security spending on a steady path while recession-hit tax receipts sag. While that certainly provides jobs and keeps services going, it doesn't repair the physical structure of the economy.

In last year's pre-Budget report chancellor Alistair Darling promised an extra £20 billion stimulus for the economy. The £3 billion earmarked for infrastructure was actually money brought forward, rather than new cash.

China spends 15 times as much
In contrast, China, whose economy is just a third larger than Britain's, announced a $570 billion (£356 billion) economic stimulus in November, to be spent within two years. That is 15 times larger than Darling's UK package, and much of it will be spent on new infrastructure.

In Russia, a $250 billion road-building scheme was announced in 2008 which would for the first time link up the entire country with 50,000km of high quality carriageway instead of the muddy potholed tracks which are common outside city boundaries.

Indian billions
India is spending $150 billion on building a national electricity grid, just part of an ambitious $700 billion plan to revolutionise infrastructure in the world's most populous nation.

In the US, a third of president Barack Obama's $825 billion stimulus package is going into infrastructure, with $30 billion to be spent on roads and $10 billion going into rail and mass transit systems. In 2005, America's civil engineers gave the country's infrastructure a "D" grade, and estimated it would cost $1.6 trillion to fix it.

Decades of under investment
"The global economy is running a major infrastructure deficit as the cost of decades of under-investment is now surfacing," Tal said in the report.

Nowhere is that more true than here. Britain was the cradle of the industrial revolution and the work of Victorian engineers, despite lamentably little maintenance in the twentieth century, outlasted most expectations.

Crumbling Victorian sewers, congested and worn-out roads, the mainline rail network and an aged Underground system in London are gradually being renewed, but at a funereal pace.

"The British are terrible at maintenance, it's a national disaster," said Joseph Lampel, Professor of Strategy at Cass Business School.

Making trains run on time
The West Coast Mainline upgrade, an £8.9 billion investment, has in theory just been completed by state-run track operator Network Rail. However, commercial train operating companies Virgin and Go-Ahead Group complain that where new and old equipment work side by side there are now more failures. Now, 20% of Virgin trains are late on the route, compared to 10% nationally.

It isn't just upgrades that run slow. New projects can take forever too. The £15.9 billion Crossrail project to link mainline railways east to west across London, has been debated for 30 years, and finally received approval in 2008. Construction will begin in 2010.

China, by contrast, is spending $275 billion on building a spanking new national high speed rail network. In five years' time, China will have more high speed lines than the rest of the world combined.

One advantage of a command economy
Perhaps this is an unfair comparison. China's citizens don't even get to vote, yet alone have a say in where and how major civil engineering projects get built. When the Three Gorges Dam was built across the Yangtze River, 1.24 million people were displaced, entire cities demolished and invaluable cultural sites buried for ever.

By contrast, the planning process for modernising and expanding Heathrow airport moves more slowly than a British Airways check-in queue. When it comes to a third runway and a sixth terminal the cost-benefit analysis of economic growth runs up against noise, pollution, over-crowding and safety concerns.

If it is decided in less than a decade, that will be a record. Maybe that is the price of democracy.

Public transport, but private money?
Yet for all this, much more does need to be done in Britain. Much of it isn't nearly as contentious as Heathrow expansion. A dozen congested cities need a tram or light rail network, vast areas of the country have neither reliable bus nor any rail service at all and are entirely dependent on private transport.

A dozen new power stations are needed to replace old and dirty coal-fired plants, and creaking and unreliable Magnox nuclear generators. The issue has been debated for decades, but the first new nuclear plant is unlikely to begin service before 2018.

Millions of Victorian homes, and many newer council homes, need proper insulation, schools need rebuilding, hospitals need refurbishing. The list goes on and on.

Incentives and plans, but little action?
There are incentives and plans, and subsidies galore for almost everything listed here. Yet, the process of turning government policy into a modern Britain is quickly diffused by bureaucracy, apathy, lack of direction and mixed incentives.

Take home insulation. Homeowners often don't realise that grants are available, underestimate the savings that can be made or can't afford the outlay. While tenants shiver in poor housing and shovel in coins to the meter, their landlords have less incentive to do the building work because they're not paying the gas bills and don't want to turf out paying tenants while work is completed.

On Merseyside, plans for a much-needed tram system were shelved in 2005 after local authorities failed to get central government assurances that the £170 million it would provide would be enough to cover costs.

While cost benefit analysis is now quite capable of capturing the value of external benefits (such as the saved time in reduced congestion) how those benefits are funded and from whom remains a tough question.

Olympian detachment
Yet while such schemes fall by the wayside, prestige projects whose long-term payback is uncertain have gone ahead. The £789 million Millennium Dome in Greenwich, London is a classic case in point of a national white elephant, predicated on over-optimist forecasts of the numbers who would be willing to pay £20 a head to visit.

The next such test is likely to be the London 2012 Olympics. With costs still soaring, having doubled to £9.3 billion from £4 billion within two years of winning the bid, the project it is unlikely to be a financial success. In the history of the games only the Los Angeles games of 1984 managed to make a narrow commercial profit.

The London Games economic outcome will ultimately be judged by the infrastructure and East London regeneration legacy it leaves in its wake. If so, that is good. But it does seem a shame that Britain cannot get as excited about needed improvements in infrastructure for their own sake.

Femi Yusoof BEng, MIET
Capital Engineering Personnel
part of Capital Group

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