The benefit to the people of Southwark should be much greater than to those in Sunderland. Southwark, not Sunderland, will become a more desirable place to live or work. As Don Riley shows, it is property owners in Southwark who see their properties rise in value, and it is in Southwark that VAT, income and company taxes generate more income for the treasury.

This classic solution achieves a much closer match of tax and benefit where the bonds and taxes are raised and serviced locally rather than nationally. This may explain why public transport is so much better funded on the continent where powers of taxation are much less centralised. The costs and benefits are more closely matched in locality.

Funding by Site Values

This is a method of meeting the cost from the rise in the site values. Taxation by site value rating (SVR) raises revenue in line with the economic activity possible on a site. It would be an even better way of matching the tax to the locality of benefit than regional taxation. It would also be a perpetual income so long as the line served the locality. SVR is therefore an excellent way of funding the building of public infrastructure.

In Britain we do not have SVR, but a project in Edinburgh suggests another way to extract the cost of a public project from site values. Don Riley's book also refers to this.

A consortium of specialists with rail, property and local government expertise has bought options on many sites around an old Edinburgh goods rail route. They will upgrade it to a modern commuter route. This is confidently expected to raise the value of the sites on which the consortium owns options. When these sites are sold they expect sufficient profit to pay off the loan that was needed to upgrade the line. One of these sites is a prime site for a Tesco supermarket.

Public Private Partnership (aka PFI)

This grew out of a Thatcherite view of economics. It is still loved by Whitehall, probably because it enables government to disown responsibility when things go wrong.

It was simplistically argued that public investment shows little tangible profit, but private investment does lead to profit in the books of companies. Therefore, according to this argument, private investment enriches the country but public investment does not. It follows that the country should grow profitable more quickly if its resources are made available to private companies instead of absorbed in government projects. Strict controls were brought in on government borrowing (PSBR). Local government investment virtually ceased from that point and central government has been so seriously curtailed itself that PFI had to be invented.

PFI circumvents these self-inflicted rules by placing a long-term contract with a private company that raises the money by taking on bank loans or issuing a company bond. The interest is paid over a long term for some 'service' provided by the private partner. Clearly the service has to be priced at a level that will also cover the interest and repayment costs of the loan, but the treasury no longer counts the loan against PSBR! The interest payments will also be higher than on a government issued bond. This is because it is more risky to lend to a private company than to government. A company may go bankrupt, but government income from taxes is absolutely certain.

The lovers of PFI argue that private companies are both more efficient and better at quantifying and controlling risk than public bureaucracies of government. They therefore accept the additional costs of the loan as the price of transferring the risk off their desk to a private company who they can blame when things go wrong.

The nature of the 'service' is usually shrouded in secrecy. It is generally the outcome of protracted negotiations whose outcome differs for every PFI contract.

The evidence for greater private sector efficiency is now also being questioned. It is now clear that a private company such as Railtrack can go bankrupt leaving government to carry the risk after all.

The link between land and PFI is rarely mentioned. But land is frequently handed over to the private company as part of the deal. It is often in a prime location that is likely to rise in value as a consequence of the new infrastructure. Land may therefore be a hidden element in the attraction of PFI to private companies. The public sector is often very bad at making use of its land resources. British Rail had vast tracts of underused land in city areas and land played a key role in persuading British Aerospace to take over BMC (Rover). Royal Ordnance depots (in prime sites) were included as a sweetener in the deal.

Yet the huge increase in land values around the Jubilee Line shows that public investment can be immensely profitable. The Thatcherites were blind to this part of the equation. PFI enthusiasts also fail to realise that the 'services' bought from the private company have to be paid for out of taxation. PFI now has little to defend itself except its unproven claims for better risk management and efficiency.

'Just Print the Money!' say Monetary Reformists

That sounds daft, but great minds such as Lincoln, Ricardo and Keynes have made similar claims. Bonds and interest they say are unnecessary.

The value of money is determined by the level of economic activity divided by the amount of money in circulation. If government simply writes cheques to pay for the project there will be more money and it will therefore fall in value. But this inflation need not persist because, when complete, the new infrastructure increases economic activity, which raises the value of the money in circulation. We know from site valuations that the Jubilee Line