Politicians on both side of the pond are hailing infrastructure investment as the key to boosting the economy and improving the lot of disaffected voters, but for that to happen we need to be better at selecting projects that deliver the greatest benefit
Two events took place this month, one global and one local, which shine a light on the potential role of construction in driving economic recovery. One of course was Donald Trump’s acceptance speech as president-elect, during which he pledged to re-build highways, bridges and schools and hospitals. The other, rather more local, was the announcement by Network Rail that some of the scope of the electrification of the Great Western Line would be deferred amidst reports of slow progress and increasing costs.
The two are linked because of the growing belief that investment in infrastructure, as part of a wider loosening of fiscal policy, will be the next lever to be pulled in the long-running struggle to get developed world economies growing at a pace that delivers benefits to all. The results of the Brexit referendum and now the US election have been widely interpreted as being a repudiation of monetary interventions such as quantitative easing and ultra-low interest rates, even as Mark Carney has taken a great deal of credit for the Bank of England’s swift response to post-Brexit panic in June.
This policy only works if the investment takes place and it delivers the expected benefits. In other words, the certainty and productivity of investment in built assets is key to its impact as a fiscal lever. Up to now, delays associated with various funding wheezes dreamed up by cash-strapped governments has held back expected investment in housing and infrastructure. George Osborne planned investment funds back by sovereign wealth funds and pension funds but rarely got past the sticking point of delivery risk. Slow progress on the implementation of the €300bn Juncker Plan in Europe (the EC’s investment plan announced by its president Jean-Claude Juncker in 2014)s, where €11bn worth of projects have been approved so far, also suggests that successes such as the Thames Tideway Tunnel are exceptions rather than the rule.
Should the shackles be taken off Treasury and local authority funding, then the focus will fall far more on the ability of clients to identify and bring forward the right projects
Should the shackles be taken off Treasury and local authority funding, then the focus will fall far more on the ability of clients to identify and bring forward the right projects, and for the construction industry to respond by delivering the greatest bang per buck for the local economy. This is crucial because it can be shown that depending on the choices made, countries secure dramatically different levels of contribution to GDP from their built assets. Previous research published by Arcadis, for example, has highlighted that both the UK and US extract a much greater return from their ageing and intensively-used asset base than other OECD countries such as Germany, France and Japan. The allocation of appropriate levels of funding to a deliverable programme becomes the next key step in ensuring that the planned outcomes of fiscal measures are delivered.
This is where issues raised by progress on the Great Western Electrification programme are so important. One of the causes of delay is the lower than expected productivity of off-site manufacturing and industrialisation initiatives used on the programme. This means that costs have gone up significantly as the programme has required much more resource than planned. However, cost inflation is not simply a problem for government. Much of the UK’s infrastructure investment is driven by private business and their crowding-out through higher costs could be an unintended consequence of the government’s renewed enthusiasm for capital spending. The combination of scarce labour resource and low returns from innovation has been a toxic one for construction and it is really important that these issues are addressed head-on as part of any plans for a national drive for public and private investment in housing and infrastructure.
Clearly innovation will have a critical role, and the continuing evolution of collaboration initiatives such as the recently relaunced I3P,(the Infrastructure Industry Innovation Programme), is critical in ensuring that the industry takes positive steps to drive improved performance and greater certainty of programme outcomes. Individual consultants and constructors can play their part by collaborating more effectively - delivering better solutions and eliminating waste. However, clients are accountable too, particularly in the public sector - in selecting the projects that deliver greatest benefit and that are deliverable - given current and future constraints on capacity. A programmatic approach to investment will certainly help - going beyond the scope of the national infrastructure delivery plan - to consider not only the aggregate benefits of a portfolio of investment but also how a supply chain can best be engaged to manage delivery in the most productive way. This is a formidable undertaking, but has to be a better approach than the seemingly random list of projects that have been announced in Budgets and Autumn Statements over the past few years.
A key opening theme of Theresa May’s administration was the urgent need to deliver to the needs of communities blighted by austerity and globalisation. Putting together a plan which addresses these interests while piloting a route to fiscal expansion is a true challenge. Ahead of the Autumn Statement, I can foresee the short-term funding initiatives but am less confident that the UK is on track towards a vision for post-Brexit infrastructure - whether to make the UK more internationally competitive or more efficient in using scarce resources.
Balancing short and long-term priorities is the perpetual challenge of government. Balancing investment between the local and the national, and between the tactical and strategic is particularly critical for a resource constrained industry like ours. In delivering the greatest good we must ensure that we invest in the future, as well as the present.
Simon Rawlinson is head of strategic research and insight at Arcadis UK