What the National Infrastructure Plan will mean for construction
Acceleration of the big infrastructure projects
The 2010 National Infrastructure Plan (NIP 2010) first made reference a year ago to Government investing over £40bn in projects - including transport, carbon capture and storage, the high-speed rail network, Crossrail, research facilities and the Green Investment Bank.
Progress on these has not been fast since then. However, that’s probably not surprising. Few infrastructure projects are truly “shovel ready” given their commercial and technical complexity, the degree of public consultation required and the amount of design work involved. On Mersey Gateway, contract award is currently scheduled for the end of 2013 and the first stage of High Speed 2 is not planned to be complete until 2026. So, while it may be possible to advance some of the work when government wants to do more to create growth, the degree to which major investment can be accelerated is limited. For some transport projects such as the London Underground upgrades, where work has begun, site access times can also be a significant constraint. And public consultation takes time. This affects not just megaprojects but also smaller schemes such as waste PFI where lengthy planning rejections and appeals remain routine. Lastly, developing the equipment and skills to build specialised infrastructure has a long lead time in itself, and too much pressure on the supplier base may simply increase cost to the taxpayer without increasing output.
While continued focus on economic infrastructure projects is likely, we expect to see statements that things will be accelerated - and more genuine efforts to do that - rather than major new announcements.
Pension fund money to fund infrastructure projects - is this realistic? What’s held it back in the past?
That puts more emphasis on systemic changes to improve the climate for the medium term. People have been saying for well over a decade that there’s a match to be made here. Pension investors and their fund managers want long term investments that offer stable and relatively low risk returns, and that’s exactly what infrastructure offers. But so far the institutional money that’s come into infrastructure has largely been from a few institutions investing through specialised infrastructure funds, or by foreign investors from North America investing directly in some large projects. Why? Mainly because infrastructure projects are unquoted investments that require specific due diligence to assess risk and prospective returns. They are not quoted assets with a track record or market price, and usually involve a period where investors have to wait for construction to finish before getting a running yield. Few if any pension funds currently have the resources with experience to assess the risks that such projects hold. Encouraged by expressions of interest in the sector from a few big pension investors, one or two have whom have recruited specialist expertise, the government may announce a scheme to help funds to come together to look at projects. This is good in principle but it will change the picture only when the groups that come into this arrangement focus on the sector, specifically seek to increase their exposure and bring together a team to help them. Benefits are likely to come gradually and in our view it’s unlikely that the industry as a whole will give a significantly increased weighting to infrastructure as a sector
The review of the Public Finance Initiative (PFI). What needs to be improved?
PFI has been talked about for nearly 20 years with the first schemes reaching financial close and beginning construction 15 years ago. In this time, it has only provided only around 10% of public investment in public services, but that still equates to over £50bn and 700 projects. Clearly lessons have been learned from that experience. To name a few - contracts are often too inflexible; equity returns are probably a bit higher than they should be; and more recently the debt market has not been open to the projects, or has expected prohibitive margins to participate.
So it’s absolutely right that this government should be looking at what can now be changed to improve things. As participants in the sector we welcome that. We expect another government attempt to use its own liquidity to provide guarantees or direct funding that will reduce the cost of capital, without taking the whole project onto its balance sheet. This might include stage funding by government during construction periods, which contractors could welcome providing it doesn’t bring unrealistic complexity to the security agreements. Government contracts could also be improved to allocate risks differently, so that those which the private sector seems to find difficult to price, or at least charges a premium for, are retained to a greater extent by the public sector. Balancing that, we expect future contracts to provide fairer and more efficient ways for the public sector to be able to ask for changes with fair marginal pricing, which has not always been achieved through PFI in the past. There should also be steps to further streamline and standardise procurement, which will reduce transaction costs and help to increase transparency and the scope for bench marking prices.
No doubt there will be some rebranding of the way government does things. However, given the fiscal situation and the investment requirements, we expect government will still want to encourage private investment into infrastructure assets and concessions. It’s certainly time for improvements, but prepare for generation of private finance rather than radical change or a decline in the role that structures of this sort play in the sector. Of course there will be an emphasis on economic infrastructure like road and rail that drive growth, rather than social infrastructure such as hospitals, which government still needs to pay for over time.
The debate about road tolls as an alternative to increases in Fuel Duty
This is currently a red herring. The independent Cook report into the future of the Strategic Road Network published by the transport department on 24 November made it clear that road tolling should be considered as an option for investment in new roads. Present government policy is that the introduction of road pricing across the existing road network will not be considered. It is very likely that long term reductions in aggregate fuel duty receipts caused by more fuel efficient and differently powered vehicles will force a Treasury-led review into new forms of roads related taxation. At that point the merits of using road pricing to gradually replace fuel duty as well as to influence the time of day of usage of scarce road capacity will become clear. This will not be an overnight solution.
Tony Poulter is a partner and infrastructure specialist at PwC