It is widely acknowledged that the gap between the UK’s infrastructure needs and what it is building (or plans to) is widening. In its Infrastructure Progress Review of 2022, the National Infrastructure Commission remarked that “gaps are opening up between aspiration and execution,” with the UK “falling behind in many infrastructure sectors.”
At face value, this is perhaps unsurprising. Surging construction inflation and depleted Treasury coffers – following high levels of pandemic spending and sluggish economic performance – have forced departments to reign in spending and rendered a swathe of infrastructure projects unaffordable.
Consequently, projects have been pared back, pushed back, or scrapped altogether. In March of this year, ministers announced that parts of HS2 would be rephased and work on the Euston terminus has been paused. The story is similar in roads, with the construction of the Lower Thames Crossing – the largest upgrade to the UK’s road network in a generation – being re-phased by two years. And in health, plans to build 40 new hospitals by 2030 have been down-scaled.
The merits of deferring projects as a response to inflation are questionable and will likely have the opposite effect on affordability. The laws of compounding interest have taught us that deferred projects, without a scope reduction, will be much more expensive in real terms. Unless there is a global reset, rising prices for material, labor, and equipment, as well as other issues, will continue to impact the construction industry.
Deferring, delaying, or re-phasing projects also creates a bigger problem for the future. Not only does it compromise the lengthy (and costly) analysis on which planning and investment decisions are based, forcing extensive rework; more importantly, it delays the societal and economic benefits of big-ticket infrastructure at a time that we need to speed up, not slow down, if we are to build a fairer and stronger society, secure our energy independence and decarbonize our economy.
So how do we plug the infrastructure gap, and the sharply widening funding gap that is driving it? The answer may lie in private capital, where there are resources ready and willing to invest in infrastructure. Private capital also brings other benefits, stimulating innovation and driving down cost by creating strong financial motivators for performance improvement (if designed correctly, of course). It sounds like a perfect match, but there are three key challenges that must be overcome.
First, International competition for capital is increasingly fierce, with the U.S. introducing its Inflation Reduction Act and the EU unveiling its Green Deal Industrial Plan. Other countries are getting on board too: in the Middle East, Saudi Arabia is creating commercial and legal structures to enable private sector participation in public projects and has a rapidly growing pipeline. The list goes on.
Second, the UK lacks a defined commercial structure to enable capital to be deployed into many of its infrastructure projects. The UK should be a logical destination for infrastructure capital. Pension, infrastructure, and sovereign funds are attracted to “good” projects, and the UK has them, along with the stable (if not perfect) regulatory regime and legal frameworks that give investors confidence. But the absence of a successor to PF2 – which was phased out abruptly in 2018 – leaves no clear route to connect private capital with public infrastructure projects facing funding gaps.
Finally, the planning regime for major infrastructure projects has become slower, less predictable, and more expensive, reducing the confidence and appetite of investors, who need certainty that projects will actually happen when deploying capital. HM Treasury acknowledges that “the system has slowed in recent years, with the timespan for granting DCOs increasing by 65% between 2012 and 2021.”
So, what to do? A review of the latter – specifically the Development Consent Order regime – is underway, albeit in its early stages.
The former two are, however, pricklier issues. The UK Government’s response to investment-boosting legislation in the U.S. and Europe has been limited, and it has been silent on what should replace PF2. Resurrecting it in its former guise is unlikely to be the right answer, but neither is continuing to defer critical infrastructure projects and allowing the gap to grow ever wider. Financial necessity requires a route forward and a way of activating private capital is the logical contender.
Moving forward will require ministers to do more than just bring institutional investors to the table; they will need to take the lead in developing the solution. Waiting for the investor community to pitch ideas will not work; with significant opportunities outside our national borders and capital flows that follow the path of least resistance, an active intervention will be required. And it will be required soon.
A united voice across the sector would also move the conversation forward and there is an opportunity for both public and trade bodies alike – including the UK Infrastructure Bank, Infrastructure and Projects Authority, and Construction Leadership Council, amongst others – to bring a cohesive voice to ministers.
The UK has the potential to close the infrastructure gap and deliver bold, transformative projects that the country so urgently needs. But it needs to grasp the nettle.
This article was first published for IPE Real Assets.
© Copyright 2023. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
