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Green infrastructure investment

Why investors want the economy re-balanced more than anyone else.

Should you feel better about your retirement knowing that the government is cajoling your pension fund manager into investing your hard earned savings in their pet infrastructure projects?  Well, yes, maybe.  

For national infrastructure in general, and “green” infrastructure (wind farms and the like) in particular, the chatter in recent years has revolved around how the vast new projects required to maintain and replace our national infrastructure will be financed.  Policy-makers and financiers alike have expounded the virtues of direct investment in these projects by “institutional investors”, who are largely pension funds, insurance companies and sovereign wealth funds. In 2011 the Treasury issued a National Infrastructure Plan which targeted exactly these sources of capital, and there are no end of initiatives to encourage such investment flows.

So is it a good thing; can it be done; or will it mean we will all have to work even longer as our savings are squandered on white elephant projects?
The first thing to note is that money is not the problem, and to look to institutional investors and sovereign wealth funds for money is not particularly insightful. The savings of the world tend to reside in one of two places: where we have put away funds for our old-age and in the national treasuries of export and resource rich economies. This, as any good bank robber would observe, is simply where the money is.

If money is not the problem, it must be the conduit for the money that is lacking, and that should be a concern to financiers and policy-makers alike.  
There is the risk that as citizens we commit in three different ways to this new infrastructure: we invest through our pension funds; we pay for investment through our energy bills; or our taxes are used directly (the National Infrastructure Plan talks about the use of government guarantees to encourage these new investors, for instance).

Ideally we want the conduit for investment to be capable of executing the construction and operation of this new infrastructure as efficiently as possible, while managing the risks of doing so. This will increase the returns to our pension savings, while keeping our energy bills as low as possible and socialising as little risk as possible among current and future tax-payers.  

 “Choose your conduit well” should be inscribed above the door of all pension funds, because this is largely what they do. No manager of a large pension fund or sovereign wealth fund wants to be handed a shovel and told to go build something, or be called in the middle of the night to hear  that there is a problem with the wind farm.  These custodians of our future wealth invest either through companies or specialist investment funds (like those of my colleagues and clients) whose job it is to manage the risk of the investments on their behalf.  Backing skilled and competent management of companies or investment managers makes sure money is channelled into investment opportunities via organisations which specialise in those particular assets.

Creating efficient conduits for capital investment in green infrastructure is the real challenge, and it could be done the wrong way or the right way.
The wrong way will come as a consequence of political impatience and financial laziness.  Politicians always like to have quick wins, and there is nothing investors like better than a good, low risk return (like one underwritten by the UK government, for instance). Hence there is every reason to fear that we will miss out the bit where we create robust and efficient companies for executing the investments and managing their risks, and instead go straight to a system where the government guarantees returns to investors on poorly conceived projects in order to appear to have registered some successes.  You can rest assured that people from the City take every opportunity to tell government that if only the tax-payer would underwrite most of the risk then they would happily invest.  Why change such a well-proven model, I suppose.

Don’t get me wrong. It is not that we will be able to renew our national infrastructure or play our part in mitigating climate change without government involvement.   Initiatives such as the government’s Electricity Market Reform or the formation of a Green Investment Bank are potentially useful interventions.  The main instrument of EMR for instance is a government contract for new power stations which is intended to socialise the macroeconomic risks of the global energy market among the energy consuming public, rather than have those risks reside with the companies building clean energy power stations of various forms.  

Believe it or not, this is the right thing to do.  The truth is that we as energy consumers are inherently exposed to those risks anyway and there is no company in the world able to control and manage the risk of the global oil price, gas price, inflation and so on over the 20-50 years that these highly capital intensive investments will last for.  Hence it is alright for you, me and the nation collectively to take those risks.  Building and operating power stations however requires specific skills which you, me and most other people don’t have, and hence it is imperative, if these investments are to be done efficiently, that the obligation and incentive to develop and deploy those skills remains with the companies that are the conduit for the investment.

No risk in the real economy was ever managed in a Whitehall policy paper, or a document written by a City of London lawyer for that matter.  Risks are managed most efficiently by collections of skilled individuals in well-managed organisations, and given the scale of the capital needed to develop our green infrastructure we will need vastly more of those individuals and organisations than we have today.

This is where all parties might become aligned on the right solution.  Investors are not oblivious to the investment opportunity presented by good quality green infrastructure in one of the most creditworthy and reliable countries in the world.  They simply haven’t had sufficient well-constructed conduits through which to channel those investment funds to date.  Whether we are pensioners with money in the custody of investors, tax-payers or energy consumers, we would all rather see our infrastructure developed by companies with the requisite skills and organisation to manage those investments efficiently.  

And so we find that with a little patience and fore-thought policy-makers may find the much maligned financial sector being the biggest advocates of a rebalancing of the economy towards the skills required to build our new green infrastructure, because it is only with the build up of the required skills and expertise that we will have the conduits through which investors can deploy capital in a way which is fair to investors, consumers and tax-payers alike.

These are real world problems whose solutions lie in the real economy.

Ian Temperton is Head of the Advisory practice at Climate Change Capital.   

Ian Temperton is head of the advisory practice at Climate Change Capital

Photo: Getty Images
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What's to be done about racial inequality?

David Cameron's words on equal opportunities are to be welcomed - now for some action, says Sunder Katwala.

David Cameron made the strongest, clearest and most high profile statement about ethnic inequalities and the need to tackle discrimination ever yet offered by a British Prime Minister in his leader’s speech to the Conservative Party conference in Manchester.
“Picture this. You’ve graduated with a good degree. You send out your CV far and wide. But you get rejection after rejection. What’s wrong? It’s not the qualifications or the previous experience. It’s just two words at the top: first name, surname. Do you know that in our country today: even if they have exactly the same qualifications, people with white-sounding names are nearly twice as likely to get call backs for jobs than people with ethnic-sounding names? … That, in 21st century Britain, is disgraceful. We can talk all we want about opportunity, but it’s meaningless unless people are really judged equally”, said Cameron.
While the proof of the pudding will be in the eating, this was a powerfully argued Prime Ministerial intervention – and a particularly well-timed one, for three reasons.

Firstly, the Prime Minister was able to root his case in an all-but-universally accepted appeal for equal opportunities. It will always prove more difficult in practice to put political energy and resources behind efforts to remedy discrimination against a minority of the population unless a convincing fairness case is made that values cherished across our whole society are at stake. Cameron’s argument, that any party which tells itself that it is the party of the ‘fair chance’ and ‘the equal shot’ must have a response when there is such clear evidence of discrimination, should prove persuasive to a Conservative Party that has not seen race inequalities as its natural territory. Cameron argued that the same principles should animate responses to discrimination when it comes to race, gender and social class. Put like that, wanting job interviews to be fair – by eradicating conscious and unconscious patterns of bias wherever possible – would strike most Britons as offering as clear a case of the values of fair play as wanting the best baker to win the Great British Bake-Off on television.
Secondly, Cameron’s intervention comes at a potential "tipping point" moment for fair opportunities across ethnic groups. Traditionally, ethnic discrimination has been discussed primarily through the lens of its impact on the most marginalised. Certainly, persistent gaps in the criminal justice system, mental health provision and unemployment rates remain stark for some minority groups. What has been less noticed is the emergence of a much more complex pattern of opportunity and disadvantage – not least as a consequence of significant ethnic minority progress.

Most strikingly of all, in educational outcomes, historic attainment gaps between ethnic minorities and their white British peers have disappeared over the last decade. In the aggregate, ethnic minorities get better GCSE results on average. Ethnic minority Britons are more likely, not less likely, to be university graduates than their fellow citizens. 

As a result of that progress, Cameron’s intervention comes at a moment of significant potential – but significant risk too. Britain’s ethnic minorities are the youngest and fastest-growing sections of British society. If that educational progress translates into economic success, it will make a significant contribution to the "Great British Take-Off" that the Prime Minister envisions. But if that does not happen, with educational convergence combined with current ‘ethnic penalties’ in employment and income persisting, then that potential could well curdle into frustration that the British promise of equal opportunities is not being kept.  Cameron also mirrored his own language in committing himself to both a ‘fight against extremism’ and a ‘fight against discrimination’: while those are distinct challenges and causes, actively pursuing both tracks simultaneously has the potential, at least, depolarise some debates about responses to extremism  - and so to help deepen the broad social coalitions we need for a more cohesive society too.

Thirdly, Cameron’s challenge could mark an important deepening in the political competition between the major parties on race issues. Many have been struck by the increase in political attention on the centre-right to race issues over the last five to ten years. The focus has been on the politics of representation. By increasing the number of non-white Conservative MPs from two to seventeen since 2005, Cameron has sent a powerful signal that Labour’s traditional claim to be ‘the party of ethnic minorities’ would now be contested. Cameron was again able to celebrate in Manchester several ways in which his Cabinet and Parliamentary benches demonstrate many successful journeys of migrant and minority integration in British society. That might perhaps help to ease the fears, about integration being impossible in an era of higher immigration, which the Home Secretary had articulated the previous day.

So symbolism can matter. But facial diversity is not enough. The politics of ethnic minority opportunity needs to be about more than visits to gurdwaras, diversity nights at the party conference fringes and unveiling statues of Mahatma Gandhi in Parliament Square. Jeremy Corbyn’s first speech as Labour leader did include one brief celebratory reference to Britain’s ethnic diversity – “as I travelled the country during the leadership campaign it was wonderful to see the diversity of all the people in our country” – and to Labour bringing in more black, Asian and ethnic minority members - but it did not include any substantial content on discrimination. Tim Farron acknowledged during his leadership campaign that the Liberal Democrats have struggled to get to the starting-line on race and diversity at all. The opposition parties too will no doubt now be challenged to match not just the Prime Minister’s rhetorical commitment to challenging inequalities but also to propose how it could be done in practice.

Non-white Britons expect substance, not just symbolism from all of the parties on race inequalites.  Survation’s large survey of ethnic minority voters for British Future showed the Conservatives winning more ethnic minority support than ever before – but just 29 per cent of non-white respondents were confident that the Conservatives are committed to treating people of every ethnic background equally, while 54 per cent said this of Labour. Respondents were twice as likely to say that the Conservatives needto do more to reach out – and the Prime Minister would seem to be committed to showing that he has got that message.  Moreover, there is evidence that ethnic inclusion could be important in broadening a party’s appeal to other younger, urban and more liberal white voters too – which is why it made sense for this issue to form part of a broader attempt by David Cameron to colonise the broad centre of British politics in his Manchester speech.

But the case for caution is that there has been limited policy attention to ethnic inequalities under the last two governments. Restaurateur Iqbal Wahhab decided to give up his role chairing an ethnic minority taskforce for successive governments, unconvinced there was a political commitment to do much more than convene a talking shop. Lib Dem equalities minister Lynne Featherstone did push the CV discrimination issue – but many Conservatives were sceptical. Cameron’s new commitment may face similar challenges from those whose instinct is to worry that more attention to discrimination or bias in the jobs market will mean more red tape for business.

Labour had a separate race inequalities manifesto in 2015, outside of its main election manifesto, while the Conservative manifesto did not contain significant commitments to racial inequality. The mid-campaign launch in Croydon of a series of race equality pledges showed an increasing awareness of the growing importance of ethnic minority votes - though the fact that they all involved aiming for increases of 20 per cent by 2020 gave them a slightly back-of-the-envelope feel. 

Prime Ministerial commitments have an important agenda-setting function. A generation ago the Stephen Lawrence case opened the eyes of middle England to racist violence and police failures, particularly through the Daily Mail’s persistent challenging of those injustices. A Conservative Prime Minister’s words could similarly make a big difference in the mainstreaming of the issue of inequalities of opportunity. What action should follow words? Between now and next year’s party conference season, that must will now be the test for this Conservative government – and for their political opponents too. 

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.