Investors can take advantage of governmental stupidity

Even now, prejudiced politicians are still yelping for more grammar schools, while ignoring the success of the Baker Dearing University Technical Colleges founded by former Conservative education minister Kenneth Baker. 

Yet as the FT also said, the past 10 years of almost zero interest rates and large construction firms desperate for contracts was the ideal time in which to rebuild and modernise every type of the nation’s infrastructure. 

One obstacle has been the reluctance of any government to borrow in order to finance infrastructure spending. Labour and Conservative governments have preferred partnerships with the private sector for infrastructure projects. 

Theoretically adopted in pursuit of greater efficiency, but in reality used to keep the costs off the nation’s accounts, these schemes are now widely discredited. Private finance is inevitably more expensive than public funding and there is little evidence that it has provided value for money. Not only was nothing done, but many existing contracts and plans were delayed or cancelled, all in the name of austerity and sound money. 

Prestigious projects were also pursued instead of modest cross-country rail links.

Risks of lazy thinking

The financial crisis became one of those events that enabled senior bankers and ministers to put aside all of the economics they had ever learned and fall back on what behavioural scientists call “heuristics” – practical methods not guaranteed to be optimal, but sufficient for immediate goals. 

These shortcuts to thinking have many practical advantages, but some risks, too – of which the most dangerous and least observed is the tendency to defer to existing biases. So with the nation’s finances in a potentially similar mess to that of the 1930s, the pioneering work of economist John Maynard Keynes was swiftly forgotten and Margaret Thatcher’s belief in the housewife’s budget revived. 

But, while encouraging thrift, Baroness Thatcher never forgot that national finance was not about candle ends and cheeseparing, but summoning resources to make the necessary investments for the future – in her case, the task force to the Falkland Islands. 

To expect the private sector to finance grand projects with huge construction risks and long-term pay-offs beyond most investors’ time horizon – such as Hinkley Point power station or the HS2 rail route – is a recipe for failure. Smaller projects have done well for contractors and investors alike, as Table 1 shows.

Table 1: Infrastructure investment trusts

Yields and opportunities

This specialised sector of investment companies has been going long enough that investors are happy with the business concept and the yields of between 4-5 per cent a year.