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UK transport devolution and financing

In the last twelve months George Osborne has announce dramatic policy changes that could dismantle much of the Thatcherite architecture of English local transport created since 1979, and only incrementally rebuilt during the 13 years of Labour rule.

In effect, Osborne is offering councils what old-school Labour left-wingers such as John Prescott, and the even more market-phobic Claire Short, had promised local authorities in the 1990s, but had failed to deliver in government.

The attractions to local authorities are obvious. They will re-gain the directive powers lost in 1986, and add new ones. New and powerful bureaucracies will be created, and then there is the delicious prospect of those large capital schemes that all local authorities covet, and that are central to Osborne’s vision of provincial economic regeneration. The Chancellor is even providing a new source of funding – local government pension pots – and an intelligent and admired Labour face (Andrew Adonis) to assist delivery.

Why is Osborne doing this? After all, it is highly unlikely that the new authorities in the large urban areas will deliver Conservative administrations in cities where Tory support has been evaporating for decades.

As often, history provides a clue. Osborne is playing a very long game. In economics it is generally wise to ‘follow the money’, and it is Osborne’s fiscal changes, not the transport policy, that are the real story. Osborne is seeking to unwind a key aspect of municipal Bennery, – not the 1980s socialism of Tony Benn, but a principle of local government finance advanced by his grandfather, the longforgotten John Benn, in the 1900s.

For 100 years local government in Britain has been a story of ‘representation without taxation’, with most money collected centrally and re-allocated by the Treasury to the geographies of perceived greatest need. This was the policy advocated by ‘progressives’ like John Benn to protect local councils from both a weak tax base and the annual fluctuations in revenue that we often see in American cities (that raise more of their money from local taxes). Benn Senior used this predictable central funding for a massive programme of municipalisation, and electrification, of London’s trams.

Shifting the balance from central to local funding will change the dynamics of local democracy, placing an explicit price on policy options, and requiring politicians to assemble voter and business support for projects that come with a real local cost in terms of local taxation. This is quite different to the current situation, where many large capital projects are locally sponsored but effectively ‘free’, thanks to Treasury capital or revenue support.

At a time when transport budgets are likely to be slashed to meet protected budgets elsewhere, it’s been remarkably easy for Osborne to get politically diverse local authorities queuing up outside his office to apply for the new transport and taxation powers. Osborne seems to have achieved the neat trick of convincing local authorities that fiscal devolution means incremental funding for incremental projects, not core funding that will inevitably be subject to budgetary trade offs.

Osborne is banking on the fact that local politicians, and their officers, simultaneously benefit, and suffer, from local pride. Like America’s fictional Lake Wobegon, “where all the women are strong, all the men are good looking, and all the children are above average”, local authorities are programmed to believe that their area is a special case, with a unique claim on taxpayers’ money. Such opinions are sincerely held, but it is a mathematical fact that not all the combined authorities will receive enormous hikes in their budgets. This creates a further incentive for shrewd authorities to get to the front of the queue and grab the financial prizes that may be awarded to visionary (and compliant) city regions that sign up to Osborne’s vision.

Ah, but what about the plans for “British Wealth Funds”. Surely, they will be willing funders of any number of light rail systems, architect-designed bus stations and smart card schemes ? Perhaps, and this is clearly Osborne’s intention. But the scope for conflicts of interest is enormous. Britain has never been very good at corporatism, as we proved in the 1960s and 70s. The idea that local politicians should simultaneously direct investment from their own workers’ pension pots towards local capital projects that can’t attract funding ‘on the market’ is both politically attractive and enormously risky. Civic leaders face being placed in a financial trap, caught between voters’ demands for improved transport infrastructure, and their fiduciary obligations to provide secure retirements for public sector workers. The governance implications are significant and complex.

Ever since Robert Maxwell flopped into the Mediterranean in 1991, and it then became clear that his Mirror Group had used its own pensioners’ money to maintain the Company’s solvency, there have been legal prohibitions on businesses using pension funds for investment in their own activities. In the private sector there is now a clear and regulated distinction between the equity of a company and the investments of its pension funds. A private company is owned by its shareholders. The ‘company’ pension pot is in fact ‘owned’ by the pensioners and savers, with the company as a principle source of funding.

But haven’t Canadian and Australian pension funds already been willing investors in a variety of UK transport assets? (including Isle of Wight ferries, High Speed 1 and the East London Bus Group (ELBG). Yes they have, but these investments were made at market prices, and the investing entities had no conflicts of interest between their role to protect and enhance pensioners’ funds and their interest in the transport infrastructure of East Rutlandshire Rural District Council. When Australian investors lost their shirts on ELBG they had taken a commercial risk, and Stagecoach was the winner in a game that had been played by fair and transparent rules.

The Wealth Fund proposal therefore raises significant governance issues:

  • How much of public sector pension funds should be allocated to infrastructure?
  • Should poorly funded pension schemes accept sub-standard (or risky) investment returns to support infrastructure projects that can’t attract funds in the open market?
  • What is a fair rate of return for the potential risks?
  • And how can pension fund trustees, politicians and PTA officers protect themselves from the obvious conflict of interests between urgent demands to progress local projects, and pension funding risks that may be measured over decades?

One upside from British, as opposed to overseas, investment may be to reduce political risk. Investment by UK “widows and orphans’ may protect all investors from the kind of political hostility that in recent years sank not just Railtrack, but also Welsh Water and the London Underground ‘infracos’. Even the supposedly reformist Blair government never felt comfortable with what Shriti Vadera contemptuously called “grannies” taking equity investments in businesses that had been nationalized by Clement Attlee, and this risk has increased with a Corbynite Labour Party. Direct investment by pension funds may create broader political support of the kind enjoyed by the John Lewis Partnership. This may be very questionable economics, but it is upon such value judgments that political policies are set, and this is as true today as in the 1940s.

None of this is to suggest that UK pension funds should not have a significant role in enhancing transport assets, but very clear rules will be needed to protect fund members and local politicians. Infrastructure is a large and growing pool of capital, but there is a fundamental distinction between attracting dispassionate volunteers from overseas, and encouraging enthusiastic locals, who will be torn between conflicting objectives.