Why long-termism matters

In his leader’s speech to Labour party conference in 2011, Ed Miliband distinguished between two types of business: ‘predators’ and ‘producers’. He promised to crack down on the former. He was on to something at least insofar as he recognised there are good and bad aspects of capitalism. But the concept was simplistic and the terms incendiary. Crucially, he failed to identify the producers and make the case for them. This gave the media and his critics the space to characterise him as anti-business and anti-aspiration.

A more nuanced concept would have distinguished between the short- and long-term time horizons of business in general and the very different outcomes these produce. Short-termism is recognised by many, even in the business world, as a problem. The focus on making a quick buck displaces beneficial long-term investment. Short-termism also drives investors to saddle businesses with excessive debt and engage in firesale processes (or asset-stripping).

Contrast this with long-termism. Businesses that develop long-term strategies will tend to invest more. They also need to consider the needs of their wider stakeholders in order to make a sustainable long-term profit. This is because it is vital to consider the needs of employees, customers, suppliers and the wider local community to thrive over the long run.

Institutional investors, such as pension funds and insurance companies, typically fall into the latter category. They have fiduciary obligations to look after the savings of millions of people and invest them over the long term to generate a return for their beneficiaries. The majority of the left would argue that it is entirely appropriate for these institutional investors to make a profit for savers, provided the savings are not deployed in unethical investments.

There is a tremendous opportunity in the United Kingdom at the moment to harness the enormous firepower of these institutional investors for the good of the country. With public budgets constrained and the banks reluctant to lend, there is an opportunity for institutional investors to play a role in renewing Britain’s creaking infrastructure. They invest on a long-term basis and are in search of stable and inflation-proof returns to deliver for their beneficiaries, the general public. It can only be a win-win if these types of investors are encouraged to invest in UK infrastructure and deliver returns for savers.

There is also almost near-consensual agreement that the UK’s infrastructure is in need of urgent renewal to make it fit for purpose. Any user of congested roads, creaking railways or patchy broadband will recognise the need for a systemic upgrade across the country. And investment outside the south-east of England will enable other regions to develop in order to address the regional inequalities that prevail.

The Organisation for Economic Cooperation and Development estimates that annual infrastructure investment of 3.5 per cent of GDP is necessary in developed economies to maintain living standards, quality of life and competitiveness. Currently, public sector infrastructure investment totals around 1.5 per cent of GDP, and forecasts suggest that this will fall to 1.8 per cent of GDP by 2020-21. As a result, if the 3.5 per cent target is to be attained, much more investment will have to come from the private sector. This would be nothing new: currently, 64 per cent of planned infrastructure finance will come from the private sector (78 per cent if projects funded by a mix of public and private finance are included).

But the Labour party has not yet grasped this opportunity and is allowing the Tories to steal a march. The proposals outlined by Jeremy Corbyn so far, which have included people’s quantitative easing and the renationalisation of the railways, do not mention a role for private sector investors to play in funding construction.

Once it is accepted that there is a role for institutional investors to play in funding infrastructure renewal, as a party we then need to set about devising the right framework and policies to facilitate and incentivise this investment. But we cannot get to this stage without accepting the premise that institutional investors can play a vital role in funding the infrastructure that will develop regions outside the south-east and improve the life chances of our people.

Simply denying a role for these types of investors means that we cannot advance our principles and values. We will be stuck advocating policies and prescriptions that do not take current conditions into account. We need to make the case for the role that these types of investors can play and the benefits that this will bring to people up and down the country. Otherwise, nobody will listen to us.

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Dan Faundez is a qualified solicitor and a member of the Labour party. He tweets @DanFaundez1

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Photo: Garry Knight

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