Macro Moments Weekly: The Great Scramble for Capital

Key takeaways

1. Infrastructure has historically driven growth: Much of the UK’s rail, utility and communications infrastructure was originally built by private companies, with ownership shifting between private and public sectors over time.
2. Governments need private capital: With high public deficits and growing spending pressures, many countries are relying on private investment to fund major infrastructure projects, particularly in energy, utilities and transport.
3. A global investment boom is underway: Massive spending on infrastructure, renewable energy and AI-related data centres is creating strong demand for capital and could support economic growth similar to past industrial expansion periods.

There is a simple irony writing this whilst travelling by train from Brighton to London. The particular track I’m on is an old one, opened in 1841. Trains then didn’t have the power to go up hills, so they dug tunnels, using the debris to flatten out the valleys and when necessary, built magnificent viaducts, like the Ouse Valley one I am about to cross.

All of this was done by the private sector. An Act of Parliament was needed to build it back then; not an easy thing to do, but eventually it was passed in 1837. Just four years later it was up and running, and I am on it this morning. A year after that, a locomotive works was opened in Brighton. A seaside town became an industrial one.

One of the many issues facing the new UK prime minister is how to boost infrastructure in the country. Should the current Mayor of Manchester become the next prime minister, as many expect, he will know there is no high-speed train link between Leeds and Manchester (by design, as the two Victorian companies that built out the lines going north, one west coast, one east coast from London, didn’t want competition). It takes half the time to drive between the two great cities, competitors since the Wars of the Roses, than to go by train.

But the ‘track’ that we use to drive between the cities, the M62, was built by the state and was completed in 1976.

Private companies have built ALL UK infrastructure except the roads. Since construction, these assets have been bouncing in and out of private and public ownership. In 1876, Joseph Chamberlain nationalised the water and gas companies of Birmingham. Parliament nationalised the telegraph network in 1869, and in 1880, the Post Office won a landmark court case against the new telephone companies because they used the telegraph cables laid along the rail network for their calls. So, they were in fact state-sanctioned franchises. After the ruling, they were then granted 31-year leases at a cost of 10% of sales.¹

After 1945, in the wave of nationalisation, the public sector subsumed all these assets. And by the late 1970s, they were threadbare—failing to work because of a failure to invest. The privatisations of the 1980s were a response to the lack of money central government had, poor existing management and a philosophical belief that the private sector could run rail, water, energy and telephony better than bureaucrats. This was extended further to the building and maintenance of hospitals, schools, rail and other projects, under the PFI scheme launched in 1992. It delivered more than 700 projects between 1995 and 2018 for a build cost of £70bn, all off the government’s balance sheet.²

So once again, the question is asked across the world: How can a state re-invigorate its infrastructure without money? Most governments have significant deficits post-COVID, which are still rising. How do you pump up the economy without adding to government debt? The European solution is to not count capital investment as a part of national debt; elsewhere it is to get the private sector to deliver these projects at a regulated rate of return.

This has led to estimates that around US$2 trillion will need to be spent between now and the end of the decade on infrastructure projects worldwide. Much of this is electrification, new transmission and production for the supply of renewable energy and new capacity for energy and water-hungry data centres.  

This demand increase comes alongside the capital expenditure boom that artificial intelligence (AI) has driven; consensus estimates suggest this will be about US$3 trillion in the last five years of this decade, financed in part from cash flow. The world—and in particular the United States—is in the midst of an infrastructure building boom to match that of the railroads in the 1860s. It’s hard to be bearish about growth with this backdrop.

But let’s not forget the State. It too has its needs: to spend on defence and the demands of an ageing population for health care and pensions. The United States, India and China run the largest deficits as a percentage of gross domestic product in the G20, and those deficits are getting larger. The demographic problems of Europe and China are well-known, and thus competition for aging investors’ cash is strong. As the world’s interest-rate setter, the United States has a significant advantage in attracting both public and private capital.

Put simply, the demand for money to invest has rarely been higher. So, the rates of return ought to rise. What raising the bar of returns does to other sectors of the economy is clear. But we have seen this before—in the 1850s and 1860s—and they were decades of precocious growth on both sides of the Atlantic! The Draghi reforms, the AI boom, and the aims of the new UK prime minister are curiously all the same.

Parting Shot

Since 1945, there have been 14 elections in the United Kingdom. The victors of 12 of the 14 all went to Oxford except two, 1951 won by Winston Churchill and 1992, won by John Major. Neither went to a university. Looking ahead to the next election, which will be held by May 2029, Andy Burnham went to Cambridge, Kemi Badenoch went to Sussex and Nigel Farage does not have a degree!