Borrowing to invest is all very well but what about value for money?

The precise contents of the budget are still secret. But a widely trailed theme is that the Chancellor, Rachel Reeves, wants to create as much scope as possible for extra public sector investment. She appears to be willing to rewrite the existing fiscal rules in order to accommodate the increase.

In principle of course there is a strong case for treating investment in, say, a new road, differently from what is known as current spending. The latter can be thought of as the operational costs of running the public sector, such as the wages and salaries of public servants.

A pay rise for the junior doctors mainly translates into extra private consumption by them. A new road could open up new economic opportunities and help raise the growth rate of the economy. This not only increases living standards but generates a future stream of tax receipts for the government.

A crucial question is whether additional public investment does actually deliver positive net benefits to the economy.  

A major issue here is the estimation of costs. All too frequently, initial costs escalate, with a corresponding reduction in the net benefit of the scheme.

The most notorious example at present is of course HS2. The proposed cost of the full high-speed link connecting London to Manchester and Leeds more than tripled from £32bn in 2012 to £106bn in 2020, when first the Leeds and then the Manchester extensions were scrapped. The costs of the London to Birmingham section, under construction, have at least doubled.

In Scotland, an important project is the dualling of the A9, the main route connecting the Highlands to Glasgow and Edinburgh. The contract for a six-mile stretch near Inverness was awarded last year. The costs have risen by £111m. This is not the total cost of building a mere six miles of road, but just the estimated overspend. The actual costs are now estimated to be an incredible £308m.

One likely reason for this endemic problem is the increasing emphasis being placed on “value for money” at the tendering stage.   

It is difficult, indeed impossible, to disagree with the concept itself. But its practical application leaves much to be desired. In essence, an incentive is created to underestimate costs in the tender in order to win the bid.

This seems to have been at the heart of the collapse of two major construction companies in recent years. In 2016 Carillion was valued at £2bn. By 2018 it was worthless. The company culture seems to have been to win government contracts at any price. So when there were genuine cost issues, the company lost money.

Last month, another major UK largest construction firm, ISG, went into administration. The company was involved with no fewer than 69 government contracts.

At the level of the economy as a whole, a Treasury document issued on 2 August this year is illuminating. Entitled Fixing the Foundations, it reports on the identification of the highly contentious “black hole” of £22bn in the nation’s finances.

A truly remarkable section is headed: Strengthening the fiscal framework to ensure this never happens again. A key recommendation to ensure it never happens again is to formalise the Office for Budget Responsibility’s power to forecast overspend. All economic forecasts are subject to wide margins of error. A forecast can be made of overspend, but this does not mean that it will be correct.

Within the public sector, an almost mystical but wholly misplaced belief seems to have arisen that by demanding enough documentation, risk can more or less be eliminated.

Solving the problem of cost overruns and getting value for money is a major task. But bureaucrats demanding yet more spreadsheets will certainly not do the trick.