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The Association for Consultancy and Engineering (ACE) is calling for the creation of infrastructure gilts. This financial instrument would address the infrastructure crunch that UK plc is facing. To avoid this and help the UK compete in the global economy, ACE is recommending that the Government grasps the opportunity to tackle a £500 billion infrastructure deficit over the next decade through the funding of infrastructure investment.
With an initially weak third quarter GDP growth estimate and a reduction in the broad money supply in September, the BoE may decide to extend its quantitative easing programme by as much as £50 billion. If this happens, ACE recommends that the Government consider reserving some of the gilts issued specifically for capital infrastructure projects. This will begin the process of addressing the infrastructure deficit.
Nelson Ogunshakin, ACE Chief Executive, said: “The Government could earmark special Infrastructure Gilts for specific projects. We understand that it is important to meet short-term spending obligations and not to withdraw funding from front line public services. However, we believe that by investing in infrastructure over the medium term the UK should generate greater returns than current spending and this would keep borrowing costs low. This has the benefit of making the UK a more attractive place to do business.”
A recent UK Contractors’ Group report estimated that every pound spent on construction generates almost £3 in total economic activity. Helping to direct funds into the provision of infrastructure assets could be highly beneficial in creating demand in the economy. This would also generate tax revenues for a squeezed public purse. This should result in stable returns over the medium term. ACE will shortly be publishing a paper exploring some of the options available to the UK Government and private sector.
One method under consideration by ACE is for City investors who are looking for a stable return on investment to buy specially created corporate bonds that are designated for private sector infrastructure developers.
Nelson Ogunshakin added: “This could be a perfect opportunity to help the recovery and send out a signal that, when the recessionary dust fades, UK plc is committed to a world class infrastructure system on which future growth will be built.”
The final decision on whether to buy such bonds that the Government and the private sector create would remain with the Bank of England and the capital markets. However, ACE believes the gilts could be an attractive financial proposition as infrastructure investment has great potential.
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For press information please contact Simon Goldie on 020 7227 1892 or 07905 279328 – sgoldie@acenet.co.uk
Notes for editors
How Infrastructure Gilts would work
The Bank could purchase specific government bonds used exclusively for capital and not current public spending in a similar way to the Build America Bonds in the United States and infrastructure banks around the world. Targeting asset purchases in this way using ‘infrastructure gilts’ will ensure that the government is able to tackle the infrastructure deficit whilst at the same time enhancing aggregate demand in the economy and thus ensuring a ‘dual dividend’.
Investing in the UK’s transport, energy and social infrastructure would then provide an extensive fiscal stimulus over the medium term and give a much needed boost to investor confidence levels. Moreover, such a move would send out a signal that the authorities are seriously looking at providing solutions to the UK’s structural challenges.
Infrastructure deficit
The £500 billion deficit is based on a report by Policy Exchange: ‘Delivering a 21st century infrastructure for Britain’.
Frequently Asked Questions
1. How does the construction multiplier compare to other sectors?
According to the CBI the short term multiplier for construction spending is one of the most effective sectors in which the government could invest to stimulate economic activity in front of banking and finance, public administration and education. ONS estimates the construction output Type 1 multiplier at 2.09 with added type 2 benefits from manufacturing, transportation and tax generation totalling £2.84. Construction has one of the highest output multipliers among sectors in which the government plays a key role.
2. Is the infrastructure gilt issuance to be on top of or part of existing govt borrowing plans?
Although infrastructure is of critical importance to the future of UK plc, government infrastructure gilts could be part of the Bank of England’s Quantitative Easing programme. The government needs to prioritise infrastructure as an effective medium term fiscal and indeed economic boost.
3. Will the corporate bonds issued by private developers need some sort of Government guarantee?
Infrastructure assets can provide stable long term yield and can be economically viable without an explicit government guarantee. Successful examples in the market place include Macquarie Infrastructure Group transport investment funds that are financed through the wholesale markets and operated in the private sector.
4. How does this proposal fit with an infrastructure bank?
The ICE and Policy Exchange have both proposed the creation of an infrastructure bank. The creation of ‘infrastructure gilts’ is one mechanism that such a bank could use to increase investment. However, one can also create gilts designated for infrastructure without formally establishing such a bank.
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