Winter 2015

Financing Infrastructure: Who Foots the Bill?

Bridget Rosewell

Herodotus in his history [1] described the use of the east west route now known as the Silk Route: There is nothing in the world that travels faster than these Persian couriers. Neither snow, nor rain, nor heat, nor darkness of night prevents these couriers from completing their designated stages with utmost speed’. If these words seem familiar it is because they became the motto of the United States postal service and can be found carved on their many buildings.

This earliest of major links was thus created and maintained to enable imperial management, much as the Roman Empire later created roads to manage and control its territorial holdings. It’s therefore almost impossible to think about infrastructure without also thinking about some kind of government. These earliest roads were created largely for military purposes and paid for by exactions and loot.

However, such roads also had unintended consequences. They made possible trade and the exchange of ideas, of disease and of economies of scale. They created cities – which in turn required other infrastructure: of food production, water, sewage, and building control. The challenge in Monty Python’s Life of Brian ends up with this: All right… all right… but apart from better sanitation and medicine and education and irrigation and public health and roads and a freshwater system and baths and public order… what have the Romans done for us?’ And the final answer was Peace’!

When the Mongol invasions spread across Asia and fatally undermined first the Northern and then the Southern Song Empires, it took them some while to repurpose the infrastructure of these societies. Ghengis Khan had to be persuaded of the usefulness of populations that could be taxed (and looted) to support further invasions – and the logistical infrastructure needed to support them. But persuaded he was.

These examples are all about how physical infrastructure to support conquest and maintain power is created by either exaction or just as likely by forced labour. Unintended benefits could also be taxed, but trade was definitely a third class activity and in the Chinese empires merchants came below administrators and craftsmen.

Of course all this pre-dates capitalism, so perhaps things have changed in how infrastructure is either planned or financed. The Canal du Midi was opened in 1682, and thus on the cusp of the modern world. The motivation was security of both supply and trade as well as political power. The Minster of Finance, Colbert, in 1660 saw benefits in connecting the Atlantic and the Mediterranean through France rather than having to pass through the Straits of Gibraltar. So the aim was to undermine Spanish trade and improve access to the Languedoc. Since this area had been hard to tax and rebellious, the canal was also seen as a royal project to enable stronger control of the region. The proposal to construct the canal came from the collector of salt taxes Pierre-Paul Riquet, who clearly saw this as a way to improve his market access. The Languedoc region also had resources such as wheat, wine, woollen cloth, silk and salt which producers were struggling to export due to lack of trade. By creating the Canal du Midi, Colbert hoped to distribute goods; this would in turn strengthen royal power and open up Toulouse and its region.

This should sound familiar. It was a build and operate franchise, with Riquet offering to provide part of the finance and build the canal in return for the right to take tolls. The rest was to be paid by the State and payback was from the hypothecation of the salt tax which Riquet would then be able to collect. The Riquet family retained control over the canal for several centuries and grew rich. 

Here then is a project which has many of the features which we might expect in more modern times. Yet it has both political and power motivations as well as market and private motivation. That was the 17th century. What of succeeding ones? The prime example of privately motivated and financed infrastructure is the railway development in the UK. Individual railways were put forward by groups of entrepreneurs, though each required an Act of Parliament to make them possible. Most (though not all) lost their shareholders’ money but created unparalleled benefits for their users, both the manufacturers for whom they were mostly originally built and the passengers who eventually created larger cities and longer commutes using them.

A similar process occurred in the USA, where the gains were more easily captured by the railway companies and their owners, who were able to create monopolies for a time. Vanderbilt, Stanford, Hopkins, Crocker and Huntington are all names with a modern resonance from this period. By contrast, in continental Europe, railways were more often proposed by state institutions, though frequently financed by international investors. And there was a railway king, Bethel Henry Strousberg [2]. Here too there were similarities with the Colbert canals in that government was a major player with some of its own political objectives. But there is also a more modern twist in that government began to provide guarantees of returns to the investors who were providing the capital. This presages the Regulated Asset Base and Public Private Partnerships of our own day.

Some themes emerge. There is the process of deciding on a piece of infrastructure and its motivation; there is the process of raising money to build it; and there is the process of paying back on this debt. These can be seen in microcosm in a UK example: building sewers for London in the 1860s.

The spur to their construction was the Great Stink of 1858 when hot weather combined with untreated sewage from a fast growing city to produce a hellish atmosphere. Joseph Bazalgette was asked by the city government to come up with an answer. He designed a system with built in resilience, based on an estimate of need which started with the effluent from the most densely populated part of London, assumed the rest was as dense, and then doubled the answer. The result was a system which has lasted into the 21 st century and is only now being reinvested with a new tunnel down the river. Moreover, as the illustration shows, (Figure 1), he took the opportunity to build out embankments to contain not only his sewers but also the new underground railway. The northern riverbank was massively enhanced. This was a municipal investment, but covered by a government guarantee which permitted the Metropolitan Board of Works to borrow first £3m and then a further £1.3m. The revenues to repay this loan were both a levy on households, and the wine and coal duties which had been allocated to the Board. These duties had first been set in place to pay for the rebuilding of London after the Great Fire in 1666. They were finally abolished in 1899.

Bringing this story through to the present day, the new Thames sewer is shortly to go into construction managed by a company named after Bazalgette. It will be financed in the markets, issuing bonds which have cover from government guarantees. These bonds will be repaid by the charges on households in the Thames Water area. In other words, little has changed in the arrangements.

What has changed is the decision making process, at least in Western economies. The 20 th century saw the rise of the economics profession alongside a particular view of the way in which economies work – or should work. This might be called the planning fallacy and is shared across both left and right wings. It consists of the view that it is possible to model and describe an optimal allocation of resources. Left wing versions want to apply such a description top down, while right wing versions believe that markets’ supply this. Neither works well. In the case of the new Thames sewer, considerable resource went into the analysis of the willingness to pay’ of a consumer for better sewage – a study that might have shocked Bazalgette and which certainly tried to provide an optimal amount of sewage disposal for the future, even though that future is uncertain. Nothing like the resilience of the original solution.

A little-noticed implication of this approach is that economic performance is independent of infrastructure – it will happen anyway and the infrastructure merely provides welfare benefits such as time savings from transport or better health from clean water. This dominant view, at least in Anglo-Saxon systems, led to political decision making trumping any form of analysis, combined with a neglect of existing systems and maintenance requirements. In the UK, high-speed rail became an afterthought to the Channel Tunnel, while on the continent it was based more on principles and politics. Yet without infrastructure an economy cannot exist.

It is no surprise that China is constructing a further 20 million kilometres of high-speed rail, as well as opening more runways and airports. By 2014, China was generating more electricity than the US although this is still much less per head. In the mid-1990s power generation was moved under the control of monopoly state-owned corporations; the subsequent twenty years has seen slow steps towards more liberalisation of these monopolies and policies to split generation and distribution and to increase competition.

At first sight, this is a different model from that used to create the market infrastructure in the West. Underneath it has significant similarities. US railroads were, it is true, private companies. But international investors were eager to provide the capital to make this happen, and Henry Paulson describes this race to do the same in China with drama and chutzpah in his book, Dealing with China [3]. Cynics might think that Goldman Sachs was merely after the fees, but funds were, as ever, seeking the returns that were on offer on such investments as new countries began to take advantage of trading opportunities and needed the infrastructure to go with it. Once again it helped to have a government guaranteeing the returns and the monopoly.

Infrastructure has elements of being a public good where my use of it does not restrict yours. The capacity of a network may be limited but up to the point of congestion adding a new user has little cost. Roads are a quintessential example of this and it is hard to restrict access to the system completely. But toll roads have come into being in many ways from 18 th century Turnpike Trusts to modern motorway systems. Charges for access to electricity distribution, to canals, to water supplies, to sewers, to roads, to rail and to telecommunications are everywhere prevalent. In principle there is no reason why the charges should not recoup the costs of the investment.

However, such networks are also monopolies which are likely to restrict supply and to overcharge the marginal consumer. It is not surprising that governments get involved in planning, regulating and owning such networks. Once government is in control it has a tendency to believe it knows best and that subsidies are necessary.

And this has been universal through history. From Roman roads to Colbert’s canals through railways to power systems, governments have borrowed or printed money and exacted taxation to pay for infrastructure, even where there is the possibility of restricting access by fees and charges. The challenge that we all face is to balance access for all to a network which only becomes expensive under congestion, against the charges which prevent congestion and also pay for the finance to build the infrastructure in the first place.

The case for Crossrail in London provided a variety of forms of financial return. Fares are expected to cover operating and maintenance costs plus a contribution to capital, while specific contributions and taxes will cover most of the remainder. It’s much like Bazalgette’s sewers, and I expect the benefit to well outlast the payback period. Railways, like sewers, can last 150 years – and counting.

[1] Herodotus (c.440 BC), Histories

[2] R Roth and G Dinhobl (ed), 2008 Across the Borders: Financing the World’s Railways in the Nineteenth and Twentieth Centuries, Ashgate,

[3] H M Paulson, (2014) Dealing with China, Headline, London

Bridget Rosewell is Senior Adviser at Volterra and a member of the UK's national Infrastructure Commission. She is the author of 'Reinventing London'