Improved infrastructure is in need of innovation

It is generally accepted that modern economies require real growth in the short, medium and long term to support growth in wages, disposable income and tax revenues which, in turn, allows politicians to direct money into public goods. By public goods we mean commodities or services that are provided without profit to all members of society, often by government, like defence or roads or, in recent decades, via corporate organisations by proxy.

The well-publicised failure of Carillion this year brings into focus the whole question of how to improve Scotland’s infrastructure. The long-awaited Aberdeen bypass is delayed and as additional private capital is arranged, those losing out are the citizens of Aberdeen and their local economy. Lord Hardie is still looking into the overspend on the Edinburgh Tram project where private contracting consortium BSC cost the public purse up to £1 billion. At the same time, the Tram Project, a public good, contributed directly to the redevelopment of the Haymarket Station Transport Hub, and has supported significant property development activity in the Edinburgh western corridor to South Gyle. It throws up the question of how we measure these benefits to the public against the considerable spend involved.

Improved infrastructure is essential in Scotland to drive gross domestic product per capita back up as the numbers for Scotland remain stubbornly below 2015 levels. Infrastructure should be produced, as far as practical, in Scotland, and government should recognise that public money is cheaper to raise than private capital. The question for the future is how these two sources are combined, as the current model is looking increasingly unfit for purpose.

The work of 1970 Nobel Prize winning American economist Paul Samuelson gives Scotland a clear direction to follow in addressing the problem of faltering economic growth. He was the first economist to identify that there needed to be an optimum mix of public goods. This optimum relationship was also defined by another great thinker, early 20th century Italian economist Vilfredo Pareto. The Pareto Optimum can be used to describe how Scottish Government could provide public goods to support business activity – Pareto optimality is an economic state whereby resources are allocated in the most efficient manner and is realised where the distribution strategy of private and public resources cannot be improved without making either side’s situation worse.

In Scotland, the balance of private and public capital is dictated by legislation in the Town and Country Planning Acts, enacted in 1990 and 1997, producing Section 75 Agreements, effectively a contract between the private capital invested by property businesses and public capital managed by local authorities. These agreements can contribute to schools, affordable housing, roads and other forms of transport infrastructure. The legislation is out of date and needs a radical rethink to recapture the principles identified by Pareto and Samuelson.

Scotland is a small economy with a strong history in financial expertise and a tradition in the provision of public goods – roads and bridges (the Queensferry Crossing being the latest example), engineering expertise in defence contracting and provision of utilities with the early adoption of hydro and wind power. With the prospect of slowing economic growth and need to increase wages, it’s an opportune time for Scotland to be at the forefront of a new approach to public goods and infrastructure.

The Scottish business and banking community have a long history of taking an enlightened and innovative approach to the provision of capital for business growth and we would be well-advised to remember those principles in reacting to the threats and opportunities of the post-Brexit economic environment.

Matthew Edgar is partner in the FCP Property Development Fund at Full Circle Partners