Promoters of the new high speed rail line (HS2) between London and Birmingham claim that it will generate £2 of economic benefit for every £1 spent. The Government says the benefit will be lower, around £1.40. But if a number is the answer, then people are asking the wrong question.

What is the real benefit of arriving before the coffee gets cold?

 

Written for ResPublica, UK political think-tank and published 12 March 2012

HS2 should be a strategic piece of enabling infrastructure like no other in this country since the railways were first built. But HS2 will only be worth the investment if it is part of a comprehensive development plan to re-establish the competitiveness of the British economy. It must create prosperity for families and small business owners – it must focus on the benefits to people.

How is socio-economic success created?

In the 1980’s, the Basque Country was struggling with Franco’s legacy. Now the average GDP per capita is now on a par with the European Union average, more than doubling over the preceding 10 years. And in 2011 ETA renounced violence after five decades of armed activities.

A retrospective report by the region’s former President, Juan-Jose Ibarretxe Markuartu, highlights the success factors:

1. Concept and vision
2. Shared leadership through public-private partnership
3. A commitment to the ‘real economy’
4. A State with a social focus
5. Self-government: identity and innovation

The Basque Country may have benefitted from substantial public money at the time, something the UK has now run out of, but there are other options. The Blueprint for a British Investment Bank makes plain how we could attract private capital – en masse – to create the Keynesian stimulus our economy needs. It argues that there is a twofold rationale for a British national investment bank: to boost aggregate demand in the short-term and to contribute towards long-term structural reform of the economy by linking government policy to an investment vehicle for strategic infrastructure.

In the UK, there is currently no incentive to dissuade successive governments from knee-jerk policy changes. The Blueprint outlines how a mandate-driven bank could work in alignment with medium to long-term policy. If Government had a small vested interest in a national investment bank, then Government would think twice before jumping from one policy bandwagon to the next. “Success depends upon the vertical integration of national, regional and local policy” says Roy Adams OBE, who received his gong for regenerating notorious areas of Northern Ireland.

The UK has a number of economic devices at its disposal. The Government has resurrected the idea of enterprise zones to kick-start business. The Chancellor announced Tax Increment Finance, new borrowing powers for local authorities aimed at driving investment and growth. The Ministry of Justice is piloting Social Impact Bonds, a sophisticated financial instrument to fund social sector organisations in solving complex social problems.

Yet Britain is not propelling itself forwards as a beacon of hope because there is no coordinated plan of action.

Successful implementation requires partnerships between the public and private sectors. The UK has encyclopaedic volumes of experience in Private Finance Initiatives (PFI), but often gets the basics wrong. George Osborne is rightly reassessing PFI deals because they are typically structured the wrong way round.

It should be Government – or a national investment bank – that finances the construction of these initiatives, not the private sector. Most private equity investors (80% according to PPP experts Inspiratia) and pension funds are not interested in construction risk. However, Government or quasi-government is able to borrow money cheapest, it should take measured risks to create a better future for our children. The private sector is excellent at innovation and entrepreneurship, it should find ingenious ways of operating facilities over the long-term to deliver value for tax-payers. Projects should only be refinanced by institutional investors or via the capital markets when cash-flows and good credit ratings are established.

We need to reform Public-Private Partnerships (PPP) – not dismiss them – because the idea is inherently good.

HS2 should be a catalyst for rethinking PPP projects. Inspiratia says “if the Government wants to reform the model, it needs a pipeline of deals and demonstrate its commitment to invest”. A mandate-driven British Investment Bank that is linked to Government policy, but operationally independent of Government to attract private capital, could be the mechanism to do exactly that.

HS2 could be the first piece of a new transportation backbone that makes door-to-door travel by train faster than going by plane. In addition to linking London and Birmingham, it should extend to Manchester and Leeds as planned in phase 2. And why not Edinburgh, Exeter and Cardiff after that?

Super fast track is just the beginning. Forethought should be given to the strategic significance of where the trains stop, and enterprise zones should be created near each station. With the right planning, these enterprise zones would become pulsating nodes of the real economy, creating an interconnected network of entrepreneurship and business. Spanning the country, they would distribute prosperity and enable a competitive British economy to take root. One that is fit for purpose in the 21^st century.

The Social Innovation Park in Bilbao shows how this is possible. It is an incubator for social enterprise and social innovation at scale. Instead of merely inviting multi-national corporations to come and build stuff at their technology park, they create home-grown enterprises within disadvantaged communities – competitive social purpose organisations that produce world-class products and services. They empower local people through employment and they distribute wealth via shared ownership structures.

The first tangible – and sexy – output of the Social Innovation Park is the Hiriko ‘folding car’. Hiriko has literally reinvented the wheel and car in re-conceiving urban transportation. It is being rolled out in Malmö, Berlin and the Galapagos Islands.

This success would not have been possible without the vision and lucid plan of Basque leaders thirty years ago.

What is stopping this degree of joined up thinking in Britain?