Infrastructure And Ownership

Tuesday, 27 November 2012
By Chris Yapp

Lord Heseltine’s recent review for BIS, No Stone Unturned in Pursuit of Growth, contains many recommendations that would come as no surprise from someone who famously wanted to intervene "before breakfast, dinner and tea" in the 1980s.

At the heart of the review is the role of government in stimulating the economy through investment in infrastructure. The question I want to pose here is “what do we mean by infrastructure?” in the context of a 21st century globalised world.

I believe that there are some very interesting examples from our history which open up interesting possibilities for the ownership, funding and development of 21st century infrastructures.

Looking at the development of electricity, gas, telephone and television, for instance, which are universal or near universal services there is an interesting observation. None of them were developed by unregulated competitive free markets. We can look at other examples such as sewers, roads, airports, canals, telegraph and railways and a similar pattern emerges.

For instance if an individual wanted to build a canal as a private enterprise they were granted an act of parliament which gave them rights to develop and exploit the infrastructure they built.

The interaction between government and free enterprise in the creation of infrastructures shows many examples of innovations in funding and ownership.

For instance, in the case of Independent TV, local monopolies were granted infrastructure for a fixed period. Universal access was a requirement. The franchisees could trade in “content” with each other, so that for instance Coronation Street could be nationally available but developed by Granada TV out of Manchester.

My observation is that free markets are better at exploiting infrastructures than they are at building them.

The Building Societies Act of 1873 put building societies, mutuals, on a legal footing for the first time. To stimulate home ownership in 1969, then Chancellor Roy Jenkins introduced MIRAS, a system of tax relief on interest payments. This is an interesting example of government using the tax system to stimulate private activity in the housing infrastructure. The best example that I can find of a near universal infrastructure developed by competitive markets are petrol stations.

When I first became interested in infrastructures around the broadband developments and the internet in the early 1990s, I came across a salutary lesson.

The UK had an early lead in electricity, in power generation, but took the attitude that it would be deployed as it became economically achievable.

Germany took a different stance, that access to electricity was a necessity of the modern state. They made it economically realistic by deploying the electricity infrastructure. From that action, Germany’s private sector companies overtook the UK in a short period. Even today, the UK position on next generation networks is one of waiting for it to become affordable rather than making it affordable by investment at scale.

The 1935 Rural Electrification Act in the USA made a significant contribution to stimulating the economy after the slump of 1929. These were mutually owned.

While the brand, “The Big Society” has become toxic, it is often misunderstood. It isn’t just about the voluntary sector, but about changing the dynamic between public, private and third sectors.

The growth of new forms of employee owned companies, private equity, family-owned, sovereign wealth funds and other models of finance looks to be having a long-term impact on the PLC model in many countries. This evolving model of capitalism has many features similar to the 19th century about 50-100 years into the industrial revolution. The Victorians were incredible social innovators, and the new models of organisation were accompanied by new funding models, especially the growth of bonds. Although the Joint stock Company can be traced back to the 13th century the rapid expansion in the 19th century supported the expansion of the economy internationally. In that era all sorts of new organisations were created from the public lending library, the police, schools, co-ops just to name a few.

It is salutary to look at two pieces of City infrastructure: BACS payment schemes and the London Stock Exchange. Both were of mutual form until the last few years.

So, if we are to gets the economy moving again, what can we learn from our Victorian heritage of social innovation?

If “Boris Island” is to be built, could it be a mutual owned by the airlines and others who use it?

Some years ago I suggested that the best structure for UK railways was for the track and station infrastructure to be of mutual form, owned by competing service operators. The creation of a system of “train miles”, similar to air miles could stimulate usage. This would be similar to the co-op dividend. It would eliminate conflict, for profit purposes, between infrastructure providers and service operators.

Could we get to universal next generation broadband by adapting the ITV model? The work that would create would be similar to the electrification of rural America mentioned earlier.

Might a similar approach assist in the low-carbon infrastructure of the UK?

The World Bank developed a framework called Knowledge for Development, K4D, to look at readiness for the knowledge economy. It covers the information infrastructure, but also the innovation and skills “infrastructures”.

We live in an era where there is distrust in free markets, after the 2008 crash. While there is no appetite for central planning or government control, the prospects for growth, jobs, social and economic goals are poor.

My conclusion is that we need to move from regulating “against” abuse to regulating “for” outcomes. The interaction between the three sectors in UK history offers some glimpses. Innovation in funding and organisational ownership structures can stimulate the creation of the infrastructures that free markets exploit so well.

Private sector skills and investment can be attracted by granting temporary monopolies in the infrastructure. It happened with all sorts of infrastructures in the past.

I’ll finish by returning to the broadband issue. A village may have a single primary school, one road running through it, one pub and one post office. Yet we structure the next generation infrastructure on the basis that one network provider is bad. I’m not sure we would have electricity in the home as a universal service even today if we had followed the model we are following with next generation networks.

In response to the call for banking to be “socially useful”, I would rather see innovation than compliance. The City’s role in building the modern world was built on many examples of innovation in funding and organisational models and ownership. Why not again?

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